Job insecurity, equilibrium determinacy and E-stability in a New Keynesian model with asymmetric information. Theory and simulation analysis

TL;DR

This paper models job insecurity within a New Keynesian framework incorporating asymmetric information and labor-market frictions, revealing how news releases and policy rules affect equilibrium stability and determinacy.

Contribution

It introduces a macroeconomic model with asymmetric information and labor-market frictions, analyzing how news and policy rules influence equilibrium properties.

Findings

Equilibrium is unique and determinate when the Taylor principle holds.

News releases can cause a 'Paradox of Transparency' affecting demand and policy.

Belief-driven equilibria can emerge when the Taylor principle is violated.

Abstract

Departing from the dominant approach focused on individual and meso-level determinants, this paper develops a macroeconomic formalization of job insecurity within a New Keynesian framework in which the standard IS-NKPC-Taylor rule block is augmented with labor-market frictions. The model features partially informed private agents who receive a noisy signal about economic fundamentals from a fully informed public sector. When monetary policy satisfies the Taylor principle, the equilibrium is unique and determinate. However, the release of news about current or future fundamentals can generate a "Paradox of Transparency" through general-equilibrium interactions between aggregate demand and monetary policy. When the Taylor principle is violated, belief-driven equilibria may emerge. Validation exercises based on the Simulated Method of Moments support the empirical plausibility of the model's key implications.