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dc.contributor.author Den Haan, Wouter J.
dc.contributor.author Rendah, Pontus
dc.contributor.author Riegler, Markus
dc.date.accessioned 2016-05-30T14:11:39Z
dc.date.available 2016-05-30T14:11:39Z
dc.date.issued 2015-09
dc.identifier.uri http://hdl.handle.net/10230/26782
dc.description.abstract The interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features – in isolation – dampen them. During recessions, fears of unemployment stir up precautionary sentiments which induces agents to save more. The additional savings may be used as investments in both a productive asset (equity) and an unproductive asset (money). But even a small rise in money demand has important consequences. The desire to hold money puts deflationary pressure on the economy, which, provided that nominal wages are sticky, increases wage costs and reduces firm profits. Lower profits repress the desire to save in equity, which increases (the fear of) unemployment, and so on. This is a powerful mechanism which causes the model to behave differently from both its complete markets version, and a version with incomplete markets but without aggregate uncertainty. In contrast to previous results in the literature, agents uniformly prefer non-trivial levels of unemployment insurance.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries Ademu Working Papers Series; 8
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights.uri https://creativecommons.org/licenses/by/4.0/
dc.title Unemployment (fears) and deflationary spirals
dc.type info:eu-repo/semantics/workingPaper
dc.subject.keyword Keynesian unemployment
dc.subject.keyword Business cycles
dc.subject.keyword Search friction
dc.subject.keyword Magnification
dc.subject.keyword Propagation
dc.subject.keyword Heterogeneous agents
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess

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