Shopping Externalities and Self Fulfilling Unemployment Fluctuations*

vacancy rate because they are associated with higher vacancy costs in the labor market andwith higher monopoly distortions in the product market. Therefore, unlike in most papersof multiplicity in macroeconomics (see, e.g., Diamond 1982, Roberts 1987, Cooper and John1988, etc. . . ), in our paper it is not true that the equilibrium with the highest level of economicactivity is the most desirable. Instead, the best equilibrium is likely to depend onboth parameter values and on initial conditions. Second, our paper is silent about optimalpolicy. Even the best rational expectations equilibrium is unlikely to be e¢ cient because ofthe presence of externalities in both the labor and the product markets. Therefore, somegovernment interventions (e.g., hiring subsidies/taxes, unemployment bene…ts, public spending)may make the best equilibrium e¢ cient and eliminate suboptimal equilibria. Finally,our paper describes the macroeconomic e¤ect of a shock to the agents’expectations aboutfuture unemployment, but it does not describe the cause of these expectations shocks, or whyagents come to share the same expectations about future unemployment. Just like RBC is atheory of propagation of productivity shocks and not a theory of the origins of productivityshocks, our paper is a theory of propagation of non-fundamental shocks and not a theory ofthe origins of non-fundamental shocks.References[1] Aguiar, M., and E. Hurst. 2007. “Life-Cycle Prices and Production.” American EconomicReview, 97: 1533–59.[2] Aguiar, M., E. Hurst, and L. Karabarbounis. 2012. “Time Use During the Great Recession.”AmericanEconomic Review, forthcoming.[3] Benhabib, J., and R. Farmer. 1994. “Indeterminacy and Increasing Returns.” Journalof Economic Theory, 63: 19–41.[4] Bentolila, S., and A. Ichino. 2008. “Unemployment and Consumption Near and FarAway from the Mediterranean.”Journal of Population Economics, 21: 255–80.[5] Blanchard, O., and N. Kiyotaki. 1987. “Monopolistic Competition and the E¤ects ofAggregate Demand.”American Economic Review, 77: 647–66.[6] Boldrin, M., N. Kiyotaki, and R. Wright. 1993. “A Dynamic Equilibrium Model ofSearch, Production, and Exchange.” Journal of Economic Dynamics and Control, 17:723–58.[7] Burdett, K., and K. Judd. 1983. “Equilibrium Price Dispersion.” Econometrica, 51:955–70.48