Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

65 Pages Posted: 12 Aug 2019

See all articles by Yavuz Arslan

Yavuz Arslan

University of Liverpool Management School

Ahmet Degerli

Board of Governors of the Federal Reserve System

Gazi Kabas

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

Multiple version iconThere are 3 versions of this paper

Date Written: July 4, 2019

Abstract

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

Arslan, Yavuz and Degerli, Ahmet and Kabas, Gazi, Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks (July 4, 2019). BIS Working Paper No. 795, Available at SSRN: https://ssrn.com/abstract=3420337

Yavuz Arslan (Contact Author)

University of Liverpool Management School ( email )

Ahmet Degerli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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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