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Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

Author

Listed:
  • Yavuz Arslan

    (Bank for International Settlements (BIS))

  • Ahmet Degerli

    (Duke University - Fuqua School of Business)

  • Gazi Kabas

    (University of Zurich - Department of Banking and Finance; 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.

Suggested Citation

  • Yavuz Arslan & Ahmet Degerli & Gazi Kabas, 2019. "Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks," Swiss Finance Institute Research Paper Series 19-44, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1944
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    Cited by:

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    2. Legal, Diego & Young, Eric R., 2024. "The effect of minimum wages on consumer bankruptcy," Journal of Economics and Business, Elsevier, vol. 129(C).

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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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