The Impact of Unemployment Insurance and Unsecured Credit on Business Cycles

Michael Irwin

Staff Working Papers from Bank of Canada

Abstract: I study how unsecured credit affects the extent to which unemployment insurance (UI) policies smooth cyclical fluctuations in aggregate consumption. To do so, I develop a real business cycle model with incomplete asset markets, frictional labor markets, and defaultable debt. Using empirically consistent unemployment dynamics over the business cycle, the model generates the cyclical properties of unsecured revolving credit balances and consumer bankruptcies in the data. The model is used to quantify the aggregate implications of a policy that extends the duration of UI during recessions. The main quantitative result of this paper is that unsecured credit amplifies the extent to which UI policies smooth aggregate consumption fluctuations over the business cycle. Extensions in the duration of UI mitigate the rise in consumer bankruptcies during recessions. They also mitigate the rise in the risk premium on unsecured borrowing, which allows households to better smooth consumption.

Keywords: Business fluctuations and cycles; Credit and credit aggregates; Economic models; Fiscal policy; Labour markets (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 E62 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2023-04
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2023/04/swp2023-22.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-22

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().