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Government Commitment and Unemployment Insurance Over the Business Cycle

Yun Pei and Zoe Xie

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the role of government commitment to future policies in shaping unemployment insurance (UI) policy in a stochastic general equilibrium model of labor search and matching. Compared with the optimal(Ramsey)policy of a government with commitment, the policy under no commitment characterized by a Markov-perfect equilibrium has higher benefits and leads to higher unemployment rates in the steady state. We also find starkly different policy responses to a productivity shock or changes in unemployment. The differences arise because the Ramsey government can use an ex-ante committed policy to stimulate job search.

Keywords: Unemployment insurance; Commitment; Markov-perfect equilibrium; Business cycle (search for similar items in EconPapers)
JEL-codes: E61 H21 J64 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
Date: 2016-11-03
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