Aggregate Demand and the Dynamics of Unemployment

  title={Aggregate Demand and the Dynamics of Unemployment},
  author={Edouard Schaal and Mathieu Taschereau-Dumouchel},
We introduce an aggregate demand externality into the Mortensen-Pissarides model of equilibrium unemployment. Because firms care about the demand for their products, an increase in unemployment lowers the incentives to post vacancies which further increases unemployment. This positive feedback creates a coordination problem among firms and leads to multiple equilibria. We show, however, that the multiplicity disappears when enough heterogeneity is introduced in the model. In this case, the… CONTINUE READING