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How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance

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  • Craig, Steven G.
  • Hemissi, Wided
  • Mukherjee, Satadru
  • Sørensen, Bent E

Abstract

This paper successfully fits a model of forward looking government savings behavior to data from the U.S. state Unemployment Insurance (UI) programs 1976-2008. Specifically, we find states do not perfectly smooth tax rates in Barro's sense, but follow behavior consistent with a buffer stock model where politicians trade-off their desire to immediately expend all savings against the fear of running out of funds. We find that states increase benefits or lower taxes when savings balances are high. State UI budgets, as rationalized by the buffer stock model, display surpluses that are more pro-cyclical than Barro's model would imply but substantially less cyclical than contemporaneous budget balance.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9520.

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Date of creation: Jun 2013
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Handle: RePEc:cpr:ceprdp:9520

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Keywords: forward looking politicians; impatience; precautionary saving;

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  1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
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  19. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
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