Dissertation/Thesis Abstract

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Macroeconomic Implications of Frictions in Heterogeneous Agent Economies
by Popp, Aaron, Ph.D., The Ohio State University, 2012, 164; 10631215
Abstract (Summary)

In my first chapter, “Unemployment Benefits in a Three State Model of Employment Flows,” I evaluate the welfare effects of unemployment insurance in an incomplete insurance framework where individuals face both employment and earnings risk. I extend the aggregate labor market model of Krusell et al (2011) to include an unemployment insurance (UI) program. The model UI program is similar to UI in the United States and includes a 50 percent replacement rate of income up to a benefit cap, a finite duration of benefits, limited eligibility, and an imperfectly monitored job search requirement. I calibrate the model to match the aggregate labor market moments and flows as well as the size and scope of UI in the United States. The model UI features, especially limited eligibility, limit the steady state welfare effects of UI. As a result, removing UI from the model leads to only a 0.1 percent consumption-equivalent increase in average welfare. The welfare effects are eight times larger when all job losers are eligible for UI. I also find that the moral hazard created by the imperfectly monitored job search requirement and the finite duration of unemployment benefits lead to a spike in the employment hazard of benefit recipients at their benefit expiration, which is consistent with the empirical findings. In contrast, if benefits are uncapped, the overall rate at which benefit recipients search for work is halved in the first two months after a layoff as compared to the baseline model. Thus, modeling the effects of UI in the United States on welfare and individuals' labor supply decisions requires careful modeling of the structure of UI benefits.

Recent empirical evidence suggests that the real response of the economy to a monetary shock is seasonally dependent. In my second chapter, “Seasonality in a Menu Cost Model,” I introduce a seasonal fluctuation into a menu cost model to examine the model's ability to produce an empirically consistent seasonal cycle and a seasonally dependent response to a monetary shock. The model generates an equilibrium seasonal fluctuation in output of about 8 percent from peak to trough, which is consistent with the real seasonal cycle that I find in the data. The response of the economy to a monetary shock is seasonally dependent. An expansionary monetary shock generates stronger real effects when prices are near the trough of the seasonal cycle since firms prefer to delay their response until prices further increase in the seasonal cycle. The effect is asymmetric across seasons, so the initial and cumulative real effects of monetary shocks increase by up to 20 percent compared to the equivalent nonseasonal model.

Indexing (document details)
Advisor: Khan, Aubhik
Commitee: Evans, Paul, Khan, Aubhik, Thomas, Julia
School: The Ohio State University
Department: Economics
School Location: United States -- Ohio
Source: DAI-A 78/11(E), Dissertation Abstracts International
Subjects: Economics, Labor economics
Keywords: Economics, Heterogeneous agent, Macroeconomic model, Seasonality, Social welfare, Unemployment insurance
Publication Number: 10631215
ISBN: 9780355014952