Self-fulfilling labor wedge fluctuations and unemployment insurance ECONOMIC HISTORY AND POLITICAL ECONOMY SEMINAR
Speaker: Paulo Santos Monteiro (UoY)
Abstract: We study unemployment insurance within an equilibrium business cycle model with labor search frictions, endogenous participation, and involuntary unemployment. The model yields an endogenous countercyclical labor wedge that may generate self-fulfilling fluctuations. We show that unemployment insurance makes local indeterminacy less pervasive and, therefore, is a powerful automatic stabilizer. In calibrated versions of the model, indeterminacy occurs for replacement rates that are empirically plausible for North America, but not for the replacement rates observed for European countries.
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