Countercyclical unemployment benefits: a general equilibrium analysis of transition dynamics

Abstract

We analyze the general equilibrium effects of countercyclical unemployment benefit policies. Our heterogenous-agent model features costly job search with imperfect insurance of unemployment risk and individual savings. Our model predicts: (1) the additional unemployment under a countercyclical policy relative to that under an acyclical policy to be a superlinear function of the aggregate shock?s size, (2) a higher unemployment rate sensitivity to UI policy changes when individual savings are relatively low. Our estimates of the effects of UI policy changes are based on transition dynamics following a large, unanticipated increase in the unemployment rate.