Unemployment Insurance and Macro-Financial (In)Stability

Yavuz Arslan, Ahmet Degerli, Bulent Guler, Gazi Kabaş and Burhan Kuruscu
Additional contact information
Ahmet Degerli: Federal Reserve Board
Bulent Guler: Indiana University
Burhan Kuruscu: University of Toronto

Working Papers from University of Liverpool, Department of Economics

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 borrow more in the mortgage market. Second, the overall share of mortgages as well as the share of mortgages with higher loan-to-income ratios on bank balance sheets increase. 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: 62 pages
Date: 2024-08
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Working Paper: Unemployment Insurance and Macro-Financial (In)Stability (2024)
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