Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

62 Pages Posted: 2 Dec 2018 Last revised: 28 May 2019

See all articles by Yavuz Arslan

Yavuz Arslan

Bank for International Settlements (BIS)

Ahmet Degerli

Duke University - Fuqua School of Business

Gazi Kabas

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Date Written: November 7, 2018

Abstract

Unemployment insurance (UI) policies are implemented by many countries to lower individual income risk and to automatically stabilize macroeconomic fluctuations. To the extent that these policies are successful, however, they should be reducing precautionary savings and hence bank deposits – households' major saving instrument. In this paper, we use this lower incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that when state UI benefits become more generous bank deposits decrease. Since deposits are the main and uniquely stable funding source for banks, the decrease in deposits squeezes bank commercial lending, which in turn reduces firm investment.

Keywords: Unemployment Insurance, Banks, Firm Financing, Firm Investment

JEL Classification: D14, G21, G31, G32, J65

Suggested Citation

Arslan, Yavuz and Degerli, Ahmet and Kabas, Gazi, Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks (November 7, 2018). Available at SSRN: https://ssrn.com/abstract=3280437 or http://dx.doi.org/10.2139/ssrn.3280437

Yavuz Arslan

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Ahmet Degerli (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Gazi Kabas

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

HOME PAGE: http://https://sites.google.com/view/gazikabas/home

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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