Self-fulfilling labor wedge fluctuations and unemployment insurance

Nikolaos Kokonas () and Paulo Santos Monteiro
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Nikolaos Kokonas: University of Bath

No 2313, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: We study unemployment insurance within an equilibrium business cycle model with labor search frictions, endogenous participation, and involuntary unemployment. The model yields an endogenous countercyclical labor wedge that may generate self-fulfilling fluctuations. We show that unemployment insurance makes local indeterminacy less pervasive and, therefore, is a powerful automatic stabilizer. In calibrated versions of the model, indeterminacy occurs for replacement rates that are empirically plausible for North America, but not for the replacement rates observed for European countries.

Keywords: labor wedge; indeterminacy; unemployment insurance (search for similar items in EconPapers)
JEL-codes: E32 E62 J20 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2023-03
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2313

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