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Policy Uncertainty and Precautionary Savings

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  • Francesco Giavazzi
  • Michael F. McMahon

Abstract

In 1997 Chancellor Kohl proposed a major pension reform: he pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law - one that is crucial for our identification strategy - is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke of the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labor market choices: we find evidence of a labor supply response by those workers who can use the margin offered by part-time employment.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0863.

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Date of creation: Apr 2008
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Handle: RePEc:cep:cepdps:dp0863

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Pension Reform; Precautionary saving; uncertainty; Germany;

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References

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  1. Christopher D. Carroll & Miles S. Kimball, 2006. "Precautionary Saving and Precautionary Wealth," Economics Working Paper Archive 530, The Johns Hopkins University,Department of Economics.
  2. Francesco Giavazzi & Michael McMahon, 2008. "Policy Uncertainty and Precautionary Savings," NBER Working Papers 13911, National Bureau of Economic Research, Inc.
  3. Nicholas Bloom, 2007. "Uncertainty and the Dynamics of R&D," Discussion Papers 07-021, Stanford Institute for Economic Policy Research.
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  11. Nicola Fuchs-Schündeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," Working Papers, Center for Retirement Research at Boston College wp2008-21, Center for Retirement Research, revised Dec 2008.
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  14. Murata, Keiko, 2003. "Precautionary Savings and Income Uncertainty: Evidence from Japanese Micro Data," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(3), pages 21-52, October.
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  16. Tito Boeri & Axel Börsch-Supan & Guido Tabellini, 2001. "Would you like to shrink the welfare state? A survey of European citizens," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 7-50, 04.
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Cited by:
  1. Giavazzi, Francesco & McMahon, Michael, 2008. "Policy Uncertainty and Precautionary Savings," CEPR Discussion Papers 6766, C.E.P.R. Discussion Papers.
  2. Francesco Giavazzi & Michael McMahon, 2012. "The Household Effects of Government Spending," CAMA Working Papers 2012-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Francesco Giavazzi & Michael McMahon, 2012. "The Households Effects of Government Consumption," NBER Working Papers 17837, National Bureau of Economic Research, Inc.

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