Unemployment (fears), precautionary savings, and aggregate demand

Wouter den Haan, Markus Riegler and Pontus Rendahl ()
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Markus Riegler: LSE

No 1062, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: environment, an increase in the risk of remaining unemployed for a long time increases precautionary savings and reduces aggregate demand, which in turn exacerbates the unemployment duration further. We show that this feedback mechanism can propagate relatively modest exogenous shocks many times over and cause deep and prolonged recessions. A temporary rise in unemployment insurance, however, can largely break this vicious cycle and therefore assume the role of a powerful countercyclical policy tool.

Date: 2014
New Economics Papers: this item is included in nep-dge
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