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Optimal Unemployment Insurance In Ge: A Robustcalibration Approach

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  • Marco Cozzi

    (Queen)

Abstract

This paper implements a simple Monte Carlo calibration approach to quantitatively studythe 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 withseveral caveats. One novel result in particular is that the sampling distribution of the optimalUI 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 bythe UI scheme, or one with low replacement rates, where insurance is mainly achieved throughself-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 ratedoes not decrease with the level of MH. The qualitative patterns and quantitative fiÂ…ndings arenot altered substantially when considering an enlarged labor force, which includes the marginallyattached workers. Finally, the parameters representing the hours worked, the leisure share inthe households` consumption bundle, and the risk aversion have a fiÂ…rst order impact on theaverage welfare. The determination of the optimal UI scheme depends heavily on them. ThisfiÂ…nding suggests that extra caution should be paid when calibrating these parameters in similarenvironments.

Suggested Citation

  • Marco Cozzi, 2011. "Optimal Unemployment Insurance In Ge: A Robustcalibration Approach," Working Paper 1272, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1272
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    Cited by:

    1. Cozzi, Marco, 2014. "Equilibrium Heterogeneous-Agent models as measurement tools: Some Monte Carlo evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 208-226.
    2. Vandyck, Toon & Van Regemorter, Denise, 2014. "Distributional and regional economic impact of energy taxes in Belgium," Energy Policy, Elsevier, vol. 72(C), pages 190-203.

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    More about this item

    Keywords

    Calibration methods; Unemployment Risk; Optimal Unemployment Insurance; Heterogeneous Agents; Incomplete Markets; Computable General Equilibrium; Monte Carlo;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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