Unemployment, Borrowing Constraints and Stabilization Policies

Stéphane Auray and Aurélien Eyquem

No 2017-63, Working Papers from Center for Research in Economics and Statistics

Abstract: In this paper, we develop a tractable incomplete-market model with unemployment and borrowing constraints. We analyze the effects of ?scal and unemployment insurance policies in reaction to a large economic downturn. Policy instruments are government spending and the unemployment replacement rate. First, our incomplete-market model magnifies ?uctuations in the unemployment rate after various shocks, compared to a standard complete-market model. Second, in response to a large shock that replicates the effects of a crisis, we find that government spending should increase substantially and that the replacement rate should drop. The sign and size of government interventions are quite different in a model with complete markets. Unemployment and borrowing constraints happen to matter quite a lot in determining the aggregate effects of large shocks, the design of optimized policies in response to these shocks and the corresponding welfare gains/losses.

Keywords: unemployment; borrowing constraints; incomplete markets; unemployment insurance; public spending (search for similar items in EconPapers)
JEL-codes: D52 E21 E62 J64 J65 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2017-09-01
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
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