Does Unemployment Risk Affect Business Cycle Dynamics?

Sebastian Graves

No 1298, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, I show that the decline in household consumption during unemployment spells depends on both liquid and illiquid asset positions. I also provide evidence that unemployment spells predict the withdrawal of illiquid assets, particularly when households have few liquid assets. Motivated by these findings, I embed endogenous unemployment risk in a two-asset heterogeneous-agent New Keynesian model. The model is consistent with the above evidence and provides a new propagation mechanism for aggregate shocks due to a flight-to-liquidity that occurs when unemployment risk rises. This mechanism implies that unemployment insurance plays an important role as an automatic stabilizer, particularly when monetary policy is constrained.

Keywords: heterogeneous agent model; liquid and illiquid assets; Unemployment insurance; Unemployment risk (search for similar items in EconPapers)
JEL-codes: E10 E24 E32 E62 J64 (search for similar items in EconPapers)
Date: 2020-09-18
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1298

DOI: 10.17016/IFDP.2020.1298

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