FEDS Paper: Unemployment Insurance and Macro-Financial (In)Stability
Published: 2024-11-12 15:30
Abstract
This paper explores the macroeconomic and financial stability implications of unemployment insurance (UI) programs. We first provide a stylized model that illustrates how UI can increase aggregate demand and reduce the persistence of unemployment shocks. We then use a large-scale macroeconomic model to estimate the effects of UI on key macroeconomic and financial variables. Our results suggest that UI can have a significant stabilizing effect on the economy, reducing the volatility of output and employment and improving financial stability.
Introduction
Unemployment insurance (UI) is a social insurance program that provides temporary financial assistance to unemployed workers. UI programs have been in place in the United States for over 80 years, and they have been shown to have a significant impact on the economy.
Model
We develop a stylized model to illustrate the macroeconomic and financial stability implications of UI. The model is a two-period overlapping generations model with incomplete markets. In the model, households are subject to unemployment risk, and they can purchase UI insurance to protect themselves against this risk.
The model shows that UI can increase aggregate demand and reduce the persistence of unemployment shocks. This is because UI provides a source of income for unemployed workers, which allows them to continue spending on goods and services. In addition, UI reduces the disincentive to search for a new job, which can lead to a faster recovery from unemployment.
Empirical Analysis
We use a large-scale macroeconomic model to estimate the effects of UI on key macroeconomic and financial variables. The model is a dynamic stochastic general equilibrium (DSGE) model that is estimated using data from the United States.
Our results suggest that UI can have a significant stabilizing effect on the economy. We find that UI reduces the volatility of output and employment, and it improves financial stability. The results are robust to a variety of model specifications and parameterizations.
Conclusion
Our results suggest that UI can play an important role in macroeconomic and financial stability. UI can help to reduce the volatility of output and employment, and it can improve financial stability. These findings have important implications for policymakers, as they suggest that UI programs can be used to help stabilize the economy and reduce the risk of financial crises.
FEDS Paper: Unemployment Insurance and Macro-Financial (In)Stability
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