TITLE:
Investment Demand Beliefs and Involuntary Unemployment in a Stock Market Overlapping Generations Model
AUTHORS:
Karl Farmer
KEYWORDS:
Involuntary Unemployment, Investors’ Beliefs, Stock Market OLG Model, Existence, Dynamic Stability and Comparative Dynamics of Steady States
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.3,
June
27,
2023
ABSTRACT: It is the aim of this paper to model involuntary unemployment in Magill
and Quinzii's (2003) seminal stock market model with non-shiftable capital and affine equity-price expectations. In contrast to
New-Keynesian macro-models, unemployment
is not traced back to inflexible prices and wage rates, but to inflexible aggregate investment based on investors'“beliefs” (Farmer, 2020) about
investment demand. After setting up the stock market model, sufficient conditions for the existence and dynamic stability
of a Golden Rule steady state with involuntary unemployment are
presented and the comparative dynamics of this steady state are investigated.
While an increase in investor optimism decreases unemployment in the short and
long run, a smaller savings rate does this only temporarily.