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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks |
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| Institution | University of Zurich |
| Series Name | SSRN |
| Number | 3280437 |
| Date | 2018 |
| Abstract Text | Unemployment insurance (UI) policies are implemented by many countries to lower individual income risk and to automatically stabilize macroeconomic fluctuations. To the extent that these policies are successful, they should be reducing precautionary savings and hence bank deposits - households' major saving instrument. In this paper, we use this lower incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that when state UI benefits become more generous bank deposits decrease. Since deposits are the main and uniquely stable funding source for banks, the decrease in deposits squeezes bank commercial lending, which in turn reduces firm investment. These results imply that UI policies have the potential to destabilize the economy through banking sector by impairing banks' deposit funding - banks' major and stable funding source, which makes banks more exposed to negative shocks during bad times. |
| Official URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3280437 |
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