Firm-Specific Capital, Output-Demand Beliefs, and Involuntary Unemployment in a Stock Market Overlapping Generations Model: A Theoretical Investigation

Abstract

It is the aim of this paper to model involuntary unemployment in a perfectly competitive stock market overlapping generations model with firm-specific 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 firm managers’ “beliefs” about the expected future demand for production output. 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 is investigated. While an increase in managers’ optimism decreases unemployment in the short and long run, a smaller savings rate does this only temporarily.