Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets

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Costain, James S.; Reiter, Michael. Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets. 2004
http://hdl.handle.net/10230/758
To cite or link this document: http://hdl.handle.net/10230/758
dc.contributor.author Costain, James S.
dc.contributor.author Reiter, Michael
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.issued 2004-11-01
dc.identifier.uri http://hdl.handle.net/10230/758
dc.description.abstract We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusually long unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 890
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2014-06-03T07:14:15Z
dc.subject.keyword Macroeconomics and International Economics
dc.subject.keyword real business cycles
dc.subject.keyword matching
dc.subject.keyword precautionary saving
dc.subject.keyword unemployment insurance
dc.subject.keyword fiscal policy
dc.subject.keyword incomplete markets
dc.subject.keyword heterogeneity
dc.subject.keyword computation
dc.rights.accessRights info:eu-repo/semantics/openAccess


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