Optimal Unemployment Insurance and International Risk Sharing

44 Pages Posted: 11 Jul 2016

See all articles by Stephane Moyen

Stephane Moyen

Deutsche Bundesbank - Research Centre

Nikolai Stahler

Deutsche Bundesbank - Economics Department

Fabian Winkler

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-07

Abstract

We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercyclical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.

Keywords: Fiscal Union, International Business Cycles, International Risk Sharing, Unemployment Insurance

JEL Classification: E32, E62, H21, J64

Suggested Citation

Moyen, Stephane and Stahler, Nikolai and Winkler, Fabian, Optimal Unemployment Insurance and International Risk Sharing (2016-07). FEDS Working Paper No. 2016-054. Available at SSRN: https://ssrn.com/abstract=2807296 or http://dx.doi.org/10.17016/FEDS.2016.054

Stephane Moyen (Contact Author)

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

Nikolai Stahler

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Fabian Winkler

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.fabianwinkler.com

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