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Self-fulfilling labor wedge fluctuations and unemployment insurance

Author

Listed:
  • Nikolaos Kokonas

    (University of Bath)

  • Paulo Santos Monteiro

    (University of York)

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.

Suggested Citation

  • Nikolaos Kokonas & Paulo Santos Monteiro, 2023. "Self-fulfilling labor wedge fluctuations and unemployment insurance," Discussion Papers 2313, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2313
    as

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    File URL: https://www.lse.ac.uk/CFM/assets/pdf/CFM-Discussion-Papers-2023/CFMDP2023-13-Paper.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    labor wedge; indeterminacy; unemployment insurance;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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