UC Davis

I explore macro economic theory while I adopt recent lessons from behavioral economics. This behavioral-macro exercise not only enriches our description on the economy, but also presents a novel perspective on the policy and welfare. Two chapters are devoted to the problem of non standard preference in the labor market, and one chapter deals with heterogeneous information in the New Keynesian model.In the first chapter, I investigate how a government should distribute unemployment insurance benefits across time if a job seeker is present biased. Using the one-sided job search model, I first show that an optimal unemployment benefit is a decreasing sequence along with the unemployment spell regardless of the present bias if there’s no saving technology. I further present a condition for the optimal policy to be decreasing even if savings are possible. Finally, I use Korean data to find evidence of present bias among job seekers and to estimate the welfare gains of switching to the optimal plan from the current policy. In the second chapter, I build a New Keynesian model which features heterogeneous awareness. I assume that some consumers are aware of a part of the shocks in the econ- omy, and derive an unawareness augmented IS curve. This augmentation generates a heterogeneous awareness-driven discounting, which provides a resolution for the ‘forward guidance puzzle’. I further present ‘raising awareness’ as a communication policy, and show when it can support the monetary policy. In the third chapter, I study the value of unemployment insurance as a correctional mechanism for job seekers’ temptation. First, it urges workers to search more because the tempted workers search less than the social optimum. Second, a lower insurance for the future can correct the tempted consumers by let them save more. Finally, I show that the optimal insurance level depends on the resistance cost, and present that there is some evidence of the finite resistance cost using Korean data.