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.