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EXPECTATION EFFECTS OF REGIME SHIFTS ON LABOR MARKET DYNAMICS

  • Tong Wang (a1)
Abstract

This paper shows that expectations of possible future regime shifts can contribute to recent deep downturn and stagnant recovery in the US labor market. Apart from the current economic regimes, rational agents consider how regimes will unfold in the future and form their expectations based on the probability of occurrence. Possible regime shifts considered are the stance of monetary policy toward inflation, the degree of real wage rigidity, and the degree of autocorrelation of the shock process. The anticipation of regime shifts alters agents' decision rules and feeds back to labor market dynamics.

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Address correspondence to: Tong Wang, School of Economics, Shandong University, 27 South Shanda Road, Jinan, Shandong, P.R. China; e-mail: tongwang@sdu.edu.cn.
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I am grateful to an associate editor and two anonymous referees for their suggestions, which greatly improved the paper. I thank Thomas Laubach, Mirko Wiederholt, Stéphane Moyen, and Pei Kuang for helpful discussions and comments. Financial support from National Natural Science Foundation of China (71503147), the Fundamental Research Funds of Shandong University (Grant no. 2014HW003), and the Academic Prosperity Program provided by School of Economics of Shandong University are gratefully acknowledged. Any remaining errors are my own.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
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