Unemployment Insurance and Macro-Financial (In)Stability

RePEc Short ID: par245
ORCID iD: 0000-0002-7664-3999

Arslan, Yavuz; Degerli, Ahmet; Guler, Bulent; Kuruscu, Burhanettin

doi:10.17016/FEDS.2024.087

Working Paper

Unemployment Insurance and Macro-Financial (In)Stability

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;

JEL Classification: E21; E32; E44; E60; G20; G51;

https://doi.org/10.17016/FEDS.2024.087