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Unemployment Insurance and Macro-Financial (In)Stability

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Abstract

We identify and study two mechanisms that can overturn the stabilizing effects of unemployment insurance (UI) policies. First, households in economies with more generous UI reduce their precautionary savings and increase their mortgage debt. Second, the share of mortgages, especially those with higher loan-to-income ratios, increases on bank balance sheets. As a result, both bank and household balance sheets become more vulnerable to adverse shocks, which deepens recessions. We demonstrate the importance of these channels by employing a quantitative heterogeneous-agent general equilibrium model and by providing county-level empirical evidence from the U.S. housing and mortgage markets.

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  • Yavuz Arslan & Ahmet Degerli & Bulent Guler & Burhanettin Kuruscu, 2024. "Unemployment Insurance and Macro-Financial (In)Stability," Finance and Economics Discussion Series 2024-087, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-87
    DOI: 10.17016/FEDS.2024.087
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    More about this item

    Keywords

    Automatic stabilizers; Unemployment insurance; Household and bank balance sheets; Housing market; Mortgage debt; Foreclosures;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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