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Unemployment, Borrowing Constraints and Stabilization Policies

Author

Listed:
  • Auray Stéphane

    (CREST-ENSAI ; ULCO)

  • Eyquem Aurélien

    (ENSAI-CREST ; Université Lumière Lyon 2 ; CNRS (GATE))

Abstract

In this paper, we develop a tractable incomplete-market model with unemployment and borrowing constraints. We analyze the effects of ?scal and unemployment insurance policies in reaction to a large economic downturn. Policy instruments are government spending and the unemployment replacement rate. First, our incomplete-market model magnifies ?uctuations in the unemployment rate after various shocks, compared to a standard complete-market model. Second, in response to a large shock that replicates the effects of a crisis, we find that government spending should increase substantially and that the replacement rate should drop. The sign and size of government interventions are quite different in a model with complete markets. Unemployment and borrowing constraints happen to matter quite a lot in determining the aggregate effects of large shocks, the design of optimized policies in response to these shocks and the corresponding welfare gains/losses.

Suggested Citation

  • Auray Stéphane & Eyquem Aurélien, 2017. "Unemployment, Borrowing Constraints and Stabilization Policies," Working Papers 2017-63, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-63
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    References listed on IDEAS

    as
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    4. Morten O Ravn & Vincent Sterk, 2021. "Macroeconomic Fluctuations with HANK & SAM: an Analytical Approach," Journal of the European Economic Association, European Economic Association, vol. 19(2), pages 1162-1202.
    5. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1477-1507.
    6. Brinca, P. & Chari, V.V. & Kehoe, P.J. & McGrattan, E., 2016. "Accounting for Business Cycles," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1013-1063, Elsevier.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    unemployment; borrowing constraints; incomplete markets; unemployment insurance; public spending;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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