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Unemployment Benefit Extension at the Zero Lower Bound

Listed author(s):
  • Julien Albertini

    (Humboldt Universitat Berlin)

  • Arthur Poirier

    (Universite du Maine)

In this paper, we investigate the impact of the recent US unemployment benefit extension on labor market dynamics when the nominal interest rate is held at the zero lower bound (ZLB). Using a New Keynesian model, our quantitative experiments suggest that, in contrast to the existing literature that ignores the liquidity trapsituation, the unemployment benefit extension has reduced unemployment by 0.7 percentage points on average. The inflationary pressure caused by the benefit extension reduces the real interest rate and offsets the job search effects and the drop in firms' vacancy postings resulting from the increase in wages. Outsidethe ZLB, it has adverse effects on unemployment. Furthermore, the ZLB explains 0.9 percentage points of the rise in unemployment. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2015.07.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 18 (2015)
Issue (Month): 4 (October)
Pages: 733-751

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Handle: RePEc:red:issued:14-55
DOI: 10.1016/j.red.2015.07.003
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  1. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
  2. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  3. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
  4. Julien Albertini & Arthur Poirier, 2014. "Discount Factor Shocks and Labor Market Dynamics," SFB 649 Discussion Papers SFB649DP2014-033, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Nakata, Taisuke, 2016. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 220-240.
  6. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 143-213.
  7. Albertini, Julien & Poirier, Arthur & Roulleau-Pasdeloup, Jordan, 2014. "The composition of government spending and the multiplier at the zero lower bound," Economics Letters, Elsevier, vol. 122(1), pages 31-35.
  8. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
  9. Christopher Erceg & Jesper Lindé, 2014. "Is There A Fiscal Free Lunch In A Liquidity Trap?," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 73-107, 02.
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  12. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  13. Card, David & Levine, Phillip B., 2000. "Extended benefits and the duration of UI spells: evidence from the New Jersey extended benefit program," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 107-138, October.
  14. Boneva, Lena Mareen & Braun, R. Anton & Waki, Yuichiro, 2016. "Some unpleasant properties of loglinearized solutions when the nominal rate is zero," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 216-232.
  15. Julio Carrillo & Celine Poilly, 2013. "How do financial frictions affect the spending multiplier during a liquidity trap?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 296-311, April.
  16. Shigeru Fujita, 2011. "Effects of extended unemployment insurance benefits: evidence from the monthly CPS," Working Papers 10-35, Federal Reserve Bank of Philadelphia.
  17. Gust, Christopher J. & Lopez-Salido, J. David & Smith, Matthew E. & Herbst, Edward, 2012. "The Empirical Implications of the Interest-Rate Lower Bound," Finance and Economics Discussion Series 2012-83, Board of Governors of the Federal Reserve System (U.S.), revised Jan 2016.
  18. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
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