Unemployment Insurance in Macroeconomic Stabilization with Imperfect Expectations

Automatic stabilizers can respond to a recession without a new policy decision, but their effects on aggregate demand may still only arrive with delay. We study the transmission lag for unemployment insurance extensions in a heterogeneous-agent New Keynesian model that closely matches the incidence of unemployment risk and the response of household spending to job loss and UI extensions. More generous UI stimulates demand largely by relaxing precautionary saving, so households must anticipate future unemployment risk and benefit duration. To quantify this channel, we work directly with survey expectations, using a measured history of forecast errors and revisions, rather than committing to a specific model of belief formation. Our estimated model implies a significant Expectations-Driven Efficacy Lag. The direct effect of UI extensions on consumption peaks only after UI duration has begun to recede. In general equilibrium, the consumption multiplier is about 0.6 on impact, about half its value under full-information rational expectations, but the policy becomes more effective by the end of the first year of the recession.