Unemployment Insurance in Macroeconomic Stabilization with Imperfect Expectations

Bence Bardóczy and Joao Guerreiro

No 35705, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Automatic stabilizers can respond to a recession without a new policy decision, but their effects on aggregate demand may still only arrive with delay. We study the transmission lag for unemployment insurance extensions in a heterogeneous-agent New Keynesian model that closely matches the incidence of unemployment risk and the response of household spending to job loss and UI extensions. More generous UI stimulates demand largely by relaxing precautionary saving, so households must anticipate future unemployment risk and benefit duration. To quantify this channel, we work directly with survey expectations, using a measured history of forecast errors and revisions, rather than committing to a specific model of belief formation. Our estimated model implies a significant Expectations-Driven Efficacy Lag. The direct effect of UI extensions on consumption peaks only after UI duration has begun to recede. In general equilibrium, the consumption multiplier is about 0.6 on impact, about half its value under full-information rational expectations, but the policy becomes more effective by the end of the first year of the recession.

JEL-codes: E03 E2 E3 E6 E7 (search for similar items in EconPapers)
Date: 2026-09
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG ME
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35705.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

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:nbr:nberwo:35705

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35705
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().