Staff Working Paper No. 1,040
By Philip Schnattinger
This paper studies whether beliefs about future labour productivity independent of fundamentals at any horizon are important drivers of job creation. It develops a model with search frictions in the labour market that accounts for imperfectly observed permanent labour productivity changes. The estimation of the model shows that beliefs are important drivers of job creation in economies with larger search frictions. Beliefs explain 2%, 35%, and 55% of employment fluctuations for the US, the UK and France respectively. Furthermore, exogenous belief changes exert a more powerful influence on job creation during times when unemployment is low.
Beliefs- and fundamentals-driven job creation 