Optimal unemployment insurance in an equilibrium business-cycle model

Kurt Mitman and Stanislav Rabinovich ()

Journal of Monetary Economics, 2015, vol. 71, issue C, 99-118

Abstract: The optimal cyclical behavior of unemployment insurance is characterized in an equilibrium search model with risk-averse workers. Contrary to the current US policy, the path of optimal unemployment benefits is pro-cyclical – positively correlated with productivity and employment. Furthermore, optimal unemployment benefits react non-monotonically to a productivity shock: in response to a fall in productivity, they rise on impact but then fall significantly below their pre-recession level during the recovery. As compared to the current US unemployment insurance policy, the optimal state-contingent unemployment benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains.

Keywords: Unemployment insurance; Business cycles; Optimal policy; Search and matching (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (106)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:71:y:2015:i:c:p:99-118

DOI: 10.1016/j.jmoneco.2014.11.009

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