Working Paper: NBER ID: w29505
Authors: Rohan Kekre
Abstract: I study unemployment insurance (UI) in general equilibrium with incomplete markets, search frictions, and nominal rigidities. An increase in generosity raises the aggregate demand for consumption if the unemployed have a higher marginal propensity to consume (MPC) than the employed or if agents precautionary save in light of future income risk. This raises output and employment unless monetary policy raises the nominal interest rate. In an analysis of the U.S. economy over 2008-2014, UI beneļ¬t extensions had a contemporaneous output multiplier around 1. The unemployment rate would have been as much as 0.4pp higher absent these extensions.
Keywords: No keywords provided
JEL Codes: D52; E21; E62; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in UI generosity (J65) | Increase in aggregate demand (E00) |
| Increase in aggregate demand (E00) | Increase in output (E23) |
| Increase in output (E23) | Increase in employment (J23) |
| Increase in UI generosity (J65) | Increase in output (E23) |
| Increase in UI generosity (J65) | Increase in employment (J23) |
| Monetary policy does not respond by raising nominal interest rates (E49) | Increase in output (E23) |
| Heterogeneity in MPCs and diminished precautionary saving (E21) | Stimulus from UI (J65) |
| Extensions in UI duration during the Great Recession (J65) | Output multiplier around 1 (E23) |
| Absence of UI extensions (J65) | Increase in unemployment rate by 0.4 percentage points (F66) |