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Policy Uncertainty and Precautionary Savings

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  • Francesco Giavazzi
  • Michael McMahon

Abstract

This paper uses German micro data and a quasi-natural experiment to provide new evidence on the empirical importance of precautionary savings. Our quasi-natural experiment draws on a sharp increase in uncertainty (as reported in a survey of German citizens) observed in the run-up to the 1998 general election. Our estimates are obtained from a diff-in-diff estimator and thus overcome the identification problem that often a¤ects measures of precautionary savings. We find that household saving increases significantly following the increase in uncertainty about the future path of income, suggesting a significant precautionary savings motive. We also analyze households?response in terms of labor market choices: we find evidence of a labor supply response by workers who can use the margin offered by part-time employment. While independent of the reasons why uncertainty increased in the run-up to the election, our results are suggestive of the economic effects of "wars of attrition", i.e. situations in which reforms are delayed because political parties are unable to agree on how the burden of a reform should be shared between various groups in society. Delays in adopting a reform, or the possibilty that a reform, after it has been adopted by one government might be revoked by another, raise uncertainty and induce households to save more: consumption may fall and the economy might slow down for no other reason than political uncertainty.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 355.

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Date of creation: 2009
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Handle: RePEc:igi:igierp:355

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  1. Carroll, Christopher D. & Kimball, Miles S., 2006. "Precautionary Saving and Precautionary Wealth," CFS Working Paper Series 2006/02, Center for Financial Studies (CFS).
  2. Francesco Giavazzi & Michael McMahon, 2009. "Policy Uncertainty and Precautionary Savings," Working Papers 355, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Lusardi, Annamaria, 1998. "On the Importance of the Precautionary Saving Motive," American Economic Review, American Economic Association, vol. 88(2), pages 449-53, May.
  4. Queisser, Monika & Whitehouse, Edward, 2005. "Pensions at a glance: public policies across OECD countries," MPRA Paper 10907, University Library of Munich, Germany.
  5. Nicholas Bloom, 2007. "Uncertainty and the Dynamics of R&D," NBER Working Papers 12841, National Bureau of Economic Research, Inc.
  6. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," NBER Working Papers 8107, National Bureau of Economic Research, Inc.
  7. Martin Browning & S¯ren Leth-Petersen, 2003. "Imputing consumption from income and wealth information," Economic Journal, Royal Economic Society, vol. 113(488), pages F282-F301, 06.
  8. Nicola Fuchs-Schundeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," American Economic Review, American Economic Association, vol. 98(5), pages 1798-1828, December.
  9. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
  10. Tullio Jappelli & Franco Modigliani, 1998. "The Age-Saving Profile and the Life-Cycle Hypothesis," CSEF Working Papers 09, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  11. Orazio P. Attanasio & Agar Brugiavini, 2003. "Social Security And Households' Saving," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 1075-1119, August.
  12. Borsch-Supan, Axel H & Stahl, Konrad, 1991. "Life Cycle Savings and Consumption Constraints: Theory, Empirical Evidence, and Fiscal Implications," Journal of Population Economics, Springer, vol. 4(3), pages 233-55, August.
  13. Borsch-Supan, Axel & Reil-Held, Anette & Rodepeter, Ralf & Schnabel, Reinhold & Winter, Joachim, 2001. "The German Savings Puzzle," Research in Economics, Elsevier, vol. 55(1), pages 15-38, March.
  14. 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.
  15. 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. 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.
  2. Francesco Giavazzi & Michael F. McMahon, 2008. "Policy Uncertainty and Precautionary Savings," CEP Discussion Papers dp0863, Centre for Economic Performance, LSE.
  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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