Labour Market Frictions and Heterogeneous Expectations
نویسنده
چکیده
The aim of this paper is to investigate the effects of bounded rationality on labour market dynamics. The model is based on a standard New Keynesian model that incorporates labour market search and matching frictions developed by Trigari (2006). During the bargaining process, wages and working hours are jointly determined by firms and workers. Expectations heterogeneity is introduced by assuming that only a fraction of agents form expectations rationally and the remainder follow an adaptive rule. The results highlight important links between the degree of expectations heterogeneity, bargaining power and labour market dynamics. It is demonstrated that heterogeneous expectations can lead to substantial increase in the volatility of employment and vacancy posting in response to a monetary policy shock. JEL: D83, D84, E52, F31, F41, J64
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