Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297407 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2023-22
Publisher: 
Bank of Canada, Ottawa
Abstract: 
I study how unsecured credit affects the extent to which unemployment insurance (UI) policies smooth cyclical fluctuations in aggregate consumption. To do so, I develop a real business cycle model with incomplete asset markets, frictional labor markets, and defaultable debt. Using empirically consistent unemployment dynamics over the business cycle, the model generates the cyclical properties of unsecured revolving credit balances and consumer bankruptcies in the data. The model is used to quantify the aggregate implications of a policy that extends the duration of UI during recessions. The main quantitative result of this paper is that unsecured credit amplifies the extent to which UI policies smooth aggregate consumption fluctuations over the business cycle. Extensions in the duration of UI mitigate the rise in consumer bankruptcies during recessions. They also mitigate the rise in the risk premium on unsecured borrowing, which allows households to better smooth consumption.
Subjects: 
Business fluctuations and cycles
Labour markets
Credit and credit aggregates
Economic models
Fiscal policy
JEL: 
E2
E21
E24
E3
E32
E44
E62
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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