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Unemployment (fears), precautionary savings, and aggregate demand

Author

Listed:
  • Wouter den Haan
  • Markus Riegler

    (LSE)

  • Pontus Rendahl

    (University of Cambridge)

Abstract

environment, an increase in the risk of remaining unemployed for a long time increases precautionary savings and reduces aggregate demand, which in turn exacerbates the unemployment duration further. We show that this feedback mechanism can propagate relatively modest exogenous shocks many times over and cause deep and prolonged recessions. A temporary rise in unemployment insurance, however, can largely break this vicious cycle and therefore assume the role of a powerful countercyclical policy tool.

Suggested Citation

  • Wouter den Haan & Markus Riegler & Pontus Rendahl, 2014. "Unemployment (fears), precautionary savings, and aggregate demand," 2014 Meeting Papers 1062, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1062
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    Cited by:

    1. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    2. Christian Bayer & Ralph Luetticke & Lien Pham‐Dao & Volker Tjaden, 2019. "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk," Econometrica, Econometric Society, vol. 87(1), pages 255-290, January.
    3. Paul Beaudry & Dana Galizia & Franck Portier, 2018. "Reconciling Hayek’s and Keynes’ Views of Recessions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 119-156.
    4. Portier, Franck & Beaudry, Paul & Galizia, Dana, 2015. "Reviving the Limit Cycle View of Macroeconomic Fluctuations," CEPR Discussion Papers 10645, C.E.P.R. Discussion Papers.
    5. Markus Riegler, 2014. "The Impact of Uncertainty Shocks on the Job-Finding Rate and Separation Rate," 2014 Papers pri337, Job Market Papers.
    6. Corsetti, Giancarlo & Brendon, Charles, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.

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