The Macroeconomic Effects of Unemployment Insurance Extensions: A Policy Rule-Based Identification Approach

52 Pages Posted: 4 Apr 2024 Last revised: 6 Feb 2025

See all articles by Rubén Domínguez-Díaz

Rubén Domínguez-Díaz

Banco de España

Donghai Zhang

National University of Singapore (NUS), Department of Economics

Date Written: February 05, 2025

Abstract

We assess the macroeconomic effects of unemployment insurance (UI) extensions in the US through a novel identification scheme based on the design of the UI policy rule. Our approach exploits differences in the effects of demand shocks across US states with different responses in UI duration. Our results indicate that UI extensions have a significant stabilization role. We then show that a New Keynesian small-open-economy model with imperfect insurance against unemployment aligns with our empirical findings. Finally, we use the model to recover the implied UI multiplier, quantify the different transmission channels of UI extensions, and uncover their union-wide effects.

Keywords: Unemployment Insurance, UI extensions, Heterogeneous Agents

JEL Classification: E62, E24, E21, E30, J6, R12

Suggested Citation

Domínguez-Díaz, Rubén and Zhang, Donghai, The Macroeconomic Effects of Unemployment Insurance Extensions: A Policy Rule-Based Identification Approach (February 05, 2025). Available at SSRN: https://ssrn.com/abstract=4748618 or http://dx.doi.org/10.2139/ssrn.4748618

Rubén Domínguez-Díaz

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Donghai Zhang (Contact Author)

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

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