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On the Welfare Effect of Cyclical Policies under Incomplete Markets and Labor Market Frictions

Author

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  • Aysegul Sahin
  • Toshihiko Mukoyama

Abstract

This paper examines how policies affect people's welfare during business cycles when markets are incomplete. In particular, we analyze cyclical policies such as cyclical taxation and cyclical unemployment insurance. Those policies play two roles: smoothing the income (and consumption) process for each individual and reallocate the risks among individuals. The latter role arises since when markets are incomplete, aggregate shocks affect people differently. Our analysis focuses on the channel through the labor market. For this aim, we model labor market frictions explicitly utilizing the standard Diamond-Mortensen-Pissarides framework

Suggested Citation

  • Aysegul Sahin & Toshihiko Mukoyama, 2004. "On the Welfare Effect of Cyclical Policies under Incomplete Markets and Labor Market Frictions," 2004 Meeting Papers 647, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:647
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    References listed on IDEAS

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    More about this item

    Keywords

    Cost of Business Cycles; Incomplete Markets; Labor Market Frictions;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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