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Working Paper, No. 2022-07, March 2022 Crossref
Moral Hazard, Optimal Unemployment Insurance, and Aggregate Dynamics

In this paper, I explore how optimal aggregate dynamics can be shaped by the presence of moral hazard in unemployment insurance. I also analyze the optimal provision of unemployment insurance and the implications for the amount of cross-sectional heterogeneity. The economy that I consider embeds the Hopenhayn-Nicolini unemployment insurance model into a real business cycle model with search frictions. In a calibrated version I find that the presence of private information has large effects on optimal aggregate steady-state dynamics but not on aggregate fluctuations. In addition, I find that optimal consumption replacement ratios are approximately independent of the business cycle.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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