Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

Yavuz Arslan (), Ahmet Degerli and Gazi Kabaş
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Ahmet Degerli: Duke University - Fuqua School of Business

No 19-44, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Unemployment insurance (UI) policies are implemented by many countries to lower individual income risk and to automatically stabilize macroeconomic fluctuations. To the extent that these policies are successful, however, they should be reducing precautionary savings and hence bank deposits – households' major saving instrument. In this paper, we use this lower incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that when state UI benefits become more generous bank deposits decrease. Since deposits are the main and uniquely stable funding source for banks, the decrease in deposits squeezes bank commercial lending, which in turn reduces firm investment.

Keywords: Unemployment Insurance; Banks; Firm Financing; Firm Investment (search for similar items in EconPapers)
JEL-codes: D14 G21 G31 G32 J65 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2019-09
New Economics Papers: this item is included in nep-ban
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Related works:
Working Paper: Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks (2021)
Working Paper: Unintended consequences of unemployment insurance benefits: the role of banks (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1944

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