*
If w* = wt-1
If wt = (1-α)
for all t solving this difference equation backwards we get:
*
wt*
w0*
(1 - α)t.
(48)
Subtituting At = A0(1 + g)t and ( 48) in ( 23) we obtain:
yt =
c(1
α) α
[w* ] 1-αα
I-Ao -I
[(1+g)(1-α)]
1-α t
α
1.
(49)
If w
,*
= (1 - α)w
then, using ( 24), lt becomes:
lt =
c(1
,w* 1-α
( At ) α
1=
.1-α, ,
cAt α (1 - α)
wt
... 1-α
*----
1.
(50)
Subtituting At = A0(1 + g)t and ( 48) in ( 50) we obtain:
lt =
c(1
[ w* ] 1-α
I- Ao -I
[(1+g)(1-α)]
1—α t
1.
(51)
We have that ut < (=)(>)ut-1 if and only if lt
using ( 51):
> (=)(<)n which becomes,
c(1
α)1
[w* ] —
[ Ao ] α
[(1+g)(1-α)]
1-α t
α
> (=)(<)n.
(52)
From ( 49) and ( 51) we have that yt and lt decrease if and only if [(1+g)(1 -
α)] 1-α < 1 that is, if and only if g < —. From ( 52) if c(t-αLα - 1 ≤ n we
" [ A0 ] α
have that ut increases for all t ≥ 0. If not there will exist some t > 0 such that
lt < n.
From ( 49) and ( 51) we have that yt and lt are constant if and only if [(1 +
g)(1-α)] 1αα = 1 thatis, if and only if g = ɪ. From ( 52) if c(1w-*αΓZ -1 < n
“ [ At] α
1+α 1+α
then ut increases. If c(t*α)-α--1 = n then ut is constant. If c(1w*α)-α--1 > n
[ ^°- ] ~α~ [ ^o ] ~α~
[Ao] [Ao]
then ut decreases.
From (49) and ( 51) we have that yt and lt increase if and only if [(1+g)(1 -
α)] 1-α > 1 that is, if and only if g> —. From ( 52) if c(1w-α)-+Γ - 1 ≥ n we
α [ Ao] α
have that ut decreases for all t ≥ 0. If not there will exist some t > 0 such that
lt > n.
Proof of Proposition 5. 2 If γt = 0 it is easy to compute, using the proof of
theorem 4.1 that w't = 0 and then wtc ≥ wtt. Now, if there is unemployment from
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