July 2016

Optimal Unemployment Insurance and International Risk Sharing

Stéphane Moyen, Nikolai Stähler, and Fabian Winkler


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 countercylical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.

Accessible materials (.zip)

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

DOI: http://dx.doi.org/10.17016/FEDS.2016.054

PDF: Full Paper

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Last Update: June 19, 2020