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Optimal Unemployment Insurance in GE: a RobustCalibration Approach

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  • Marco Cozzi

    ()
    (Queen`s)

Abstract

This paper implements a simple Monte Carlo calibration approach to quantitatively study the Hansen and Imrohoroglu (1992) economy, a GE model with uninsurable employment risk, designed to assess the optimal replacement rate for a public Unemployment Insurance scheme. The results of this sensitivity analysis are consistent with the original findings, but with several caveats. One novel result in particular is that the sampling distribution of the optimal UI is bimodal. Depending on the calibrated parameters, the optimal UI is in one of two regions: a very generous scheme with high replacement rates, where insurance is mainly provided by the UI scheme, or one with low replacement rates, where insurance is mainly achieved through self-insurance. Even in the absence of moral hazard, it is never optimal to provide full insurance. Moreover, for many plausible parameters` conÂ…gurations, the welfare maximizing replacement rate does not decrease with the level of MH. The qualitative patterns and quantitative fiÂ…ndings are not altered substantially when considering an enlarged labor force, which includes the marginally attached workers. Finally, the parameters representing the hours worked, the leisure share in the households` consumption bundle, and the risk aversion have a fiÂ…rst order impact on the average welfare. The determination of the optimal UI scheme depends heavily on them. This fiÂ…nding suggests that extra caution should be paid when calibrating these parameters in similar environments.

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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1272.

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Length: 61 pages
Date of creation: Aug 2011
Date of revision:
Publication status: Published in the Economics Letters, Vol. 117 (1), pp. 28-31.
Handle: RePEc:qed:wpaper:1272

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Keywords: Calibration methods; Unemployment Risk; Optimal Unemployment Insurance; Heterogeneous Agents; Incomplete Markets; Computable General Equilibrium; Monte Carlo;

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  1. Per Krusell & Toshihiko Mukoyama & Ayseg ul Sahin, 2007. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," Levine's Bibliography 122247000000001783, UCLA Department of Economics.
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  12. Pollak, Andreas, 2007. "Optimal unemployment insurance with heterogeneous agents," European Economic Review, Elsevier, vol. 51(8), pages 2029-2053, November.
  13. Martin Gervais, 2012. "Optimal Unemployment Insurance in a Directed Search Model," 2012 Meeting Papers 1177, Society for Economic Dynamics.
  14. Nicola Pavoni, 2009. "Optimal Unemployment Insurance, With Human Capital Depreciation, And Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 323-362, 05.
  15. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
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  17. Christopher A. Sims, 2004. "Econometrics for Policy Analysis: Progress and Regress," De Economist, Springer, vol. 152(2), pages 167-175, 06.
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  19. Young, Eric R., 2004. "Unemployment insurance and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1683-1710, November.
  20. Marco Cozzi, 2011. "Precautionary Savings and Wealth Inequality: a Global Sensitivity Analysis," Working Papers 1270, Queen's University, Department of Economics.
  21. DeJong, David N. & Ingram, Beth F. & Whiteman, Charles H., 2000. "A Bayesian approach to dynamic macroeconomics," Journal of Econometrics, Elsevier, vol. 98(2), pages 203-223, October.
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Cited by:
  1. Marco Cozzi, 2011. "Equilibrium Heterogeneous-Agent Models as Measurement Tools: some Monte Carlo Evidence," 2011 Meeting Papers 1380, Society for Economic Dynamics.

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