Research / BFI Working PaperMar 01, 2021

Unemployment Insurance in Macroeconomic Stabilization

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 a quantitative analysis of the U.S. economy over 2008-2014, UI benefit extensions had a contemporaneous output multiplier around 1 or higher. At its peak, the unemployment rate would have been 0.5pp higher absent these extensions.

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