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Unemployment Insurance and Macro-Financial (In)Stability

Author

Listed:
  • Yavuz Arslan

    (University of Liverpool Management School)

  • Ahmet Degerli

    (Federal Reserve Board)

  • Bulent Guler

    (Indiana University)

  • Gazi Kabas

    (Tilburg University)

  • Burhan Kuruscu

    (University of Toronto)

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.

Suggested Citation

  • Yavuz Arslan & Ahmet Degerli & Bulent Guler & Gazi Kabas & Burhan Kuruscu, 2024. "Unemployment Insurance and Macro-Financial (In)Stability," Working Papers 202413, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:202413
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    File URL: https://www.liverpool.ac.uk/media/livacuk/schoolofmanagement/research/economics/ECON,WP,202413.pdf
    File Function: First version, 2024-08
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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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