Indeterminacy and Search Theory

Abstract

This paper investigates a dynamic general equilibrium model with search. In particular, search externalities are reflected by an increasing returns to scale matching function, which may imply an indeterminate equilibrium. Hence, the model is capable to generate business fluctuations, driven by self-fulfilling belief, characterised by unemployment persistence. A numerical simulation shows that the degree of externalities needed for indeterminacy is not too far from existing empirical estimates and the implied dynamics of employment is richer then that of standard RBC models with search.