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Whether, When and How to Extend Unemployment Benefits: Theory and Application to COVID-19

Kurt Mitman and Stanislav Rabinovich

No 15748, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy.

Keywords: Markov perfect equilibrium; optimal policy; Unemployment insurance (search for similar items in EconPapers)
JEL-codes: E6 H1 J65 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
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Journal Article: Whether, when and how to extend unemployment benefits: Theory and application to COVID-19 (2021) Downloads
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