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Unemployment, Imperfect Risk Sharing, and the Monetary Business Cycle

  • Gregory Erin Givens

This paper examines the impact of unemployment insurance on the propagation of monetary disturbances in a staggered price model of the business cycle. To motivate a role for risk sharing behavior, I construct a quantitative equilibrium model that gives prominence to an efficiency-wage theory of unemployment based on imperfectly observable labor effort. Dynamic simulations reveal that under a full insurance arrangement, staggered price-setting is incapable of generating persistent real effects of a monetary shock. Introducing partial insurance, however, bolsters the amount of endogenous wage rigidity present in the model, enriching the propagation mechanism. Positive real persistence appears in versions of the model that exclude capital accumulation as well as in versions that do not.

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File URL: http://capone.mtsu.edu/berc/working/shirk_endog_pers.pdf
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Paper provided by Middle Tennessee State University, Department of Economics and Finance in its series Working Papers with number 200710.

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Date of creation: Jul 2007
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Handle: RePEc:mts:wpaper:200710
Contact details of provider: Web page: http://www.mtsu.edu/~berc/working/Economics_Working_Papers.html
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