Welfare Analysis of Income-Stabilization Policies in a HANK Model with Unemployment Risk

Stefano Grancini, Marcos Poplawski Ribeiro and Danila Smirnov
Authors registered in the RePEc Author Service: Marcos Poplawski-Ribeiro

No 2026/076, IMF Working Papers from International Monetary Fund

Abstract: Understanding how policies can stabilize household welfare during recessions requires a framework that captures household heterogeneity, unemployment risk, and general-equilibrium labor market dynamics. We study a contractionary demand shock in a Heterogeneous-Agent New-Keynesian model with search-and-matching friction on the labor market (HANK–SAM) and compare the effectiveness of alternative income-stabilization policies. Using a common fiscal envelope, we contrast increases in unemployment insurance generosity, with targeted transfers to hand-to-mouth households, and universal transfers. Policy effectiveness is assessed through the aggregate consumers’ welfare, measured in consumption-equivalent variation units. In an economy calibrated to U.S. data, unemployment insurance yields the largest welfare gain per percentage point of fiscal cost, followed by targeted transfers, while universal transfers are the least effective. A temporary increase in unemployment insurance generates the highest welfare, as it combines immediate cash-flow support with insurance effects, disproportionally benefiting households with high marginal propensities to consume.

Keywords: Income stabilization; Heterogeneous-agent New Keynesian (HANK); Search-and-matching; Unemployment insurance; Targeted transfers; Consumption-equivalent variation; Public debt envelope; Policy effectiveness; IMF working papers; stabilization policy; household heterogeneity; contractionary demand shock; Unemployment; Unemployment benefits; Insurance; Consumption; Labor markets; Global (search for similar items in EconPapers)
Pages: 32
Date: 2026-04-10
New Economics Papers: this item is included in nep-dge and nep-mac
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