Finance and Economics Discussion Series (FEDS)
November 2024
Unemployment Insurance and Macro-Financial (In)Stability
Yavuz Arslan, Ahmet Degerli, Bulent Guler, Gazi Kabas, and Burhan Kuruscu
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 increase their mortgage debt. Second, the share of mortgages, especially those with higher loan-to-income ratios, increases on bank balance sheets. 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
DOI: https://doi.org/10.17016/FEDS.2024.087
PDF: Full Paper
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