Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks
65 Pages Posted: 12 Aug 2019
Date Written: July 4, 2019
Many countries provide unemployment insurance (UI) to reduce individuals' income risk and to moderate fluctuations in the economy. However, to the extent that these policies are successful, they would be expected to reduce precautionary savings and hence bank deposits--households' main saving instrument. In this paper, we study this reduced incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that, when UI benefits become more generous, bank deposits fall. Since deposits are the main stable funding source for banks, this fall in deposits squeezes bank commercial lending, which in turn reduces corporate investment.
Keywords: unemployment insurance, precautionary savings, bank deposits
JEL Classification: D14, G21, J65
Suggested Citation: Suggested Citation