Rubén Domínguez- Díaz

Working Papers

The Macroeconomic Effects of Unemployment Insurance Extensions: A Policy Rule-Based Identification Approach [PDF]

We assess the macroeconomic effects of unemployment insurance (UI) extensions in the US through a novel identification scheme based on the design of the UI policy rule. Our approach exploits differences in the effects of demand shocks across US states with different responses in UI duration.  Our results indicate that UI extensions have a significant stabilization role.  We then show that a New Keynesian small-open-economy model with imperfect insurance against unemployment aligns with our empirical findings. Finally, we use the model to recover the implied UI multiplier, quantify the different transmission channels of UI extensions, and uncover their union-wide effects.

Precautionary Savings and Financial Frictions (Job Market Paper)  [PDF]  

Financial frictions not only impair lending, but also the expansion of the funding side of banks’ balance sheets. They restrict the supply of bank-issued demand deposits, which are the dominant liquid asset in households’ portfolios. Tight financial conditions, thus,  render economies less resilient to shocks that lead households to demand more liquid savings. I first show empirically that one such shock, a shock to household income uncertainty, leads to a deeper recession and a muted creation of liquid deposits when financial conditions are tight. Next, I rationalize this in a two-asset New Keynesian model with heterogeneous households and a leverage constraint in the banking system that constrains liquidity transformation. A binding leverage constraint impairs the intermediation of precautionary savings, dampens the rise of both bank credit and liquid deposits, and leaves the increased demand for liquidity unsatisfied. This, finally, leads to a marked fall in household consumption.

Hiring Stimulus and Precautionary Savings in a Liquidity Trap [PDF]

Employment stabilization, and hence firms' hiring, is fundamental for households' income and consumption. This means that stabilization policies targeted at firms spill over to the demand side of the economy. The current paper shows that the demand-side effects can render supply-side policies effective, even if conventional monetary policy is constrained. In a New Keynesian model with equilibrium unemployment and incomplete markets, the paper looks at a hiring subsidy that stimulates employment. Households' desire to accumulate precautionary savings falls, raising consumption and aggregate demand. Calibrating the model to the US, the ensuing increase in inflation renders the hiring stimulus effective precisely when the central bank cannot further support aggregate demand. Instead, absent idiosyncratic risk, and thus the expansionary demand-side effects, the hiring stimulus is crowded-out.