Unemployment (fears), precautionary savings, and aggregate demand
This paper analyzes the feedback between firms' hiring decisions and the demand for their products in an environment in which agents are poorly insulated from the financial consequences of unemployment. In such an environment, an increase in the risk of remaining unemployed for a long time increases precautionary savings and reduces aggregate demand, which in turn exacerbates the unemployment duration further. We show that this feedback mechanism can propagate relatively modest exogenous shocks many times over and cause deep and prolonged recessions. A temporary rise in unemployment insurance, however, can largely break this vicious cycle and therefore assume the role of a powerful countercyclical policy tool.
Year of publication: |
2014
|
---|---|
Authors: | Haan, Wouter den ; Riegler, Markus ; Rendahl, Pontus |
Institutions: | Society for Economic Dynamics - SED |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Unemployment (fears) and deflationary spirals
Den Haan, Wouter J., (2018)
-
Unemployment (fears) and deflationary spirals
Den Haan, Wouter J., (2015)
-
Unemployment (fears) and deflationary spirals
Den Haan, Wouter J., (2015)
- More ...