Unemployment Insurance and Macro-Financial (In)Stability

Yavuz Arslan, Ahmet Degerli (), Bulent Guler () and Burhanettin Kurusçu ()
Additional contact information
Ahmet Degerli: https://www.federalreserve.gov/econres/ahmet-degerli.htm
Bulent Guler: https://economics.indiana.edu/about/faculty/guler-bulent.html
Burhanettin Kurusçu: https://www.economics.utoronto.ca/index.php/index/person/person/faculty/1287

No 2024-087, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We identify and study two mechanisms that can overturn the stabilizing effects of unemployment insurance (UI) policies. First, households in economies with more generous UI reduce their precautionary savings and increase their mortgage debt. Second, the share of mortgages, especially those with higher loan-to-income ratios, increases on bank balance sheets. As a result, both bank and household balance sheets become more vulnerable to adverse shocks, which deepens recessions. We demonstrate the importance of these channels by employing a quantitative heterogeneous-agent general equilibrium model and by providing county-level empirical evidence from the U.S. housing and mortgage markets.

Keywords: Automatic stabilizers; Unemployment insurance; Household and bank balance sheets; Housing market; Mortgage debt; Foreclosures (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 E60 G20 G51 (search for similar items in EconPapers)
Pages: 64 p.
Date: 2024-11-12
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https://www.federalreserve.gov/econres/feds/files/2024087pap.pdf (application/pdf)

Related works:
Working Paper: Unemployment Insurance and Macro-Financial (In)Stability (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-87

DOI: 10.17016/FEDS.2024.087

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