Munich Personal RePEc Archive

Government Commitment and Unemployment Insurance Over the Business Cycle

Pei, Yun and Xie, Zoe (2016): Government Commitment and Unemployment Insurance Over the Business Cycle.

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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.

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