Unemployment Benefits and Interest Rates: The Role of Age

Erik Dasenbrock and Britta Gehrke

No 74, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: This paper studies how unemployment benefits affect aggregate outcomes through general equilibrium effects. First, we document that lower unemployment benefits tend to reduce the real interest rate in a structural vector autoregression with narrative sign restrictions. Young workers experience greater employment gains than older workers. An overlapping generations model with labor market frictions rationalizes these findings. Reduced benefits boost employment among younger working-age populations, raising their incomes and enabling them to reduce borrowing, which in turn lowers real interest rates. This endogenous interest rate response amplifies the expansionary effects of the benefit reduction. The interest rate channel proves quantitatively relevant, suggesting important general equilibrium considerations for unemployment benefit design.

Keywords: Unemployment benefits; narrative SVAR; life-cycle model; real interest rate; search and matching (search for similar items in EconPapers)
JEL-codes: E21 E24 E43 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2025-09-29
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Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0074

DOI: 10.48462/opus4-5940

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