Unemployment Insurance in Chile: Does it Stabilize the Business Cycle?

We explore the stabilizing effects of unemployment insurance in Chile. A dynamic general equilibrium model is calibrated for the Chilean economy for the 1960-2000 period. We assume that the economy is subject to exogenous technological shocks and that a fraction of the population is liquidity constrained. Our main conclusion is that unemployment insurance has some stabilizing effect on the business cycle, especially on consumption, but that this effect is of the second order of magnitude. We also find that the larger the fraction of the population that is liquidity constrained, the more likely the program is welfare improving. Our results suggest that the objective of stabilizing the business cycle would be more efficiently achieved using alternative instruments.