Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks
80 Pages Posted: 2 Dec 2018 Last revised: 10 Dec 2019
Date Written: November 7, 2018
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: Suggested Citation