Unemployment insurance and the business cycle: prolong benefit entitlements in bad times?

The aim of this paper is to study the optimal duration of unemployment benefit entitlement duration across the business cycle. We wonder if the entitlement duration should be prolonged in bad and shortened in good times. Because of consumption smoothing, such a countercyclical policy can be welfare-enhancing as long as it does not affect labor market adjustment too severely or even helps to reduce inefficiencies there. If, however, the labor market is quite inflexible already, procyclical behavior may be preferable. In a calibrated dynamic business cycle framework, we find that countercyclical benefit entitlement duration may be preferable in the US but not in Europe. --Unemployment insurance,entitlement duration,business cycle

Optimal monetary policy in an estimated DSGE for the euro area

The objective of this paper is to examine the main features of optimal monetary policy within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a medium scale closed economy DSGE for the euro area. Then, we study the properties of the Ramsey allocation through impulse response, variance decomposition and counterfactual analysis. In particular, we show that, controlling for the zero lower bound constraint, does not seem to limit the stabilization properties of optimal monetary policy. the Ramsey allocation reasonably well. Such optimal simple operational rules seem to react specifically to nominal wage inflation. Overall, the Ramsey policy together with its simple rule approximations seem to deliver consistent policy messages and may constitute some useful normative benchmarks within medium to large scale estimated DSGE framework. prove the economic micro-foundation and the econometric identification of the structural disturbances. We also present simple monetary policy rules which can “approximate” and implement However, this normative analysis based on estimated models reinforces the need to improve the economic micro-foundation and the econometric identification of the structural disburbances. JEL Classification: E4, E5Bayesian estimation, DSGE Models, monetary policy, Welfare calculations

Towards a monetary policy evaluation framework

Advances in the development of Dynamic Stochastic General Equilibrium (DSGE) models towards medium-scale structural frameworks with satisfying data coherence have considerably enhanced the range of analytical tools well-suited for monetary policy evaluation. The present paper intends to make a step forward in this direction: using US data over the Volker-Greenspan sample, we perform a DGSE-VAR estimation of a medium-scale DSGE model very close to Smets and Wouters [2007] specification, where monetary policy is set according to a Ramsey-planner decision problem. Those results are then contrasted with the DSGE-VAR estimation of the same model featuring a Taylortype interest rate rule. Our results show in particular that the restrictions imposed by the welfare-maximizing Ramsey policy deteriorates the empirical performance with respect to a Taylor rule specification. However, it turns out that, along selected conditional dimensions, and notably for productivity shocks, the Ramsey policy and the estimated Taylor rule deliver similar economic propagation. JEL Classification: E4, E5, F4Bayesian estimation, DSGE Models, optimal monetary policy

Monetary policy and inflationary shocks under imperfect credibility

This paper quantifies the deterioration of achievable tabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where rice and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of aintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4Imperfect credibility, monetary policy, Signal extraction

Government expenditures and unemployment: A DSGE perspective

In a New Keynesian DSGE model with labor market frictions and liquidity-constrained consumers aggregate unemployment is likely to increase due to a non-persistent government spending shock. Furthermore, the group of asset-holding households reacts very differently from the group of liquidity-constrained consumers implying that the unemployment rate is likely to decrease for asset-holding households, while it increases among liquidity-constrained consumers. The main driver of our results is the marginal utility of consumption which moves in opposite directions for the two types. Regarding the model's parameters, we find that the size of the fiscal (unemployment) multiplier increases with i) highly sticky prices, ii) high degrees of risk aversion, iii) low convexity in labor disutility iv) high replacement rates, and v) debt-financed expenditures. --Search and matching,government spending shocks,unemployment.

A General and Efficient Method for Solving Regime-Switching DSGE Models

This paper provides a general representation of endogenous and threshold-based regime switching models and develops an efficient numerical solution method. The regime-switching is triggered endogenously when some variables cross threshold conditions that can themselves be regime-dependent. We illustrate our approach using a RBC model with state-dependent government spending policies. It is shown that regime-switching models involve strong non linearities and discontinuities in the dynamics of the model. However, our numerical solution based on simulation and projection methods with regime-dependent policy rules is accurate, and fast enough, to efficiently take into all these challenging aspects. Several alternative specifications to the model and the method are studied

A General and Efficient Method for Solving Regime-Switching DSGE Models

This paper provides a general representation of endogenous and threshold-based regime switching models and develops an efficient numerical solution method. The regime-switching is triggered endogenously when some variables cross threshold conditions that can themselves be regime-dependent. We illustrate our approach using a RBC model with state-dependent government spending policies. It is shown that regime-switching models involve strong non linearities and discontinuities in the dynamics of the model. However, our numerical solution based on simulation and projection methods with regime-dependent policy rules is accurate, and fast enough, to efficiently take into all these challenging aspects. Several alternative specifications to the model and the method are studied