On the Welfare Effect of Cyclical Policies under Incomplete Markets and Labor Market Frictions

Aysegul Sahin and Toshihiko Mukoyama

No 647, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper examines how policies affect people's welfare during business cycles when markets are incomplete. In particular, we analyze cyclical policies such as cyclical taxation and cyclical unemployment insurance. Those policies play two roles: smoothing the income (and consumption) process for each individual and reallocate the risks among individuals. The latter role arises since when markets are incomplete, aggregate shocks affect people differently. Our analysis focuses on the channel through the labor market. For this aim, we model labor market frictions explicitly utilizing the standard Diamond-Mortensen-Pissarides framework

Keywords: Cost of Business Cycles; Incomplete Markets; Labor Market Frictions (search for similar items in EconPapers)
JEL-codes: E32 J64 J65 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:647

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