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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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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1272.pdf
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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. Orazio P. Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and Bumps in Lifetime Consumption," NBER Working Papers 5350, National Bureau of Economic Research, Inc.
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  4. Marco Cozzi, 2011. "Precautionary Savings and Wealth Inequality: a Global Sensitivity Analysis," Working Papers 1270, Queen's University, Department of Economics.
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  9. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment insurance and the role of self-insurance," Discussion Papers 0102-27, Columbia University, Department of Economics.
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  14. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  15. Pollak, Andreas, 2007. "Optimal unemployment insurance with heterogeneous agents," European Economic Review, Elsevier, vol. 51(8), pages 2029-2053, November.
  16. Young, Eric R., 2004. "Unemployment insurance and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1683-1710, November.
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