Optimal Unemployment Insurance in an Equilibrium Business Cycle Model
(with Kurt Mitman) October 2014. Journal of Monetary Economics, forthcoming.
Abstract: The optimal cyclical behavior of unemployment insurance is characterized in an equilibrium search model with risk-averse workers. Contrary to the current US policy, the path of optimal unemployment benefits is pro-cyclical - positively correlated with productivity and employment. Furthermore, optimal unemployment benefits react non-monotonically to a productivity shock: in response to a fall in productivity, they rise on impact but then fall significantly below their pre-recession level during the recovery. As compared to the current US unemployment insurance policy, the optimal state-contingent unemployment benefits smooth cyclical fluctuations in unemployment and deliver substantial welfare gains.
(Earlier versions circulated under the title "Pro-cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model")
On the Multiplicity of Monetary Equilibria: Green-Zhou Meets Lagos-Wright
(with Kasie Jean and Randall Wright), Journal of Economic Theory 145 (2010), 392-401.
Unemployment Benefit Extensions Caused Jobless Recoveries!?
(with Kurt Mitman) April 2014
Abstract: The last three recessions in the United States were followed by jobless recoveries: while labor productivity recovered, unemployment remained high. In this paper, we show that countercyclical unemployment benefit extensions lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefit expiration and state-dependent extensions of unemployment benefits. In the model, an extension of unemployment benefits slows down the recovery of vacancy creation in the aftermath of a recession. We calibrate the model to US data and show that it is quantitatively consistent with observed labor market dynamics, in particular the emergence of jobless recoveries after 1990. Furthermore, counterfactual experiments indicate that unemployment benefits are quantitatively important in explaining jobless recoveries.
Research in Progress
Dynamic Inefficiency in Capital Markets with Trading Frictions
(with Andre Kurmann)
The Effect of Productivity on Optimal Insurance in the Presence of Moral Hazard