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The Precautionary Saving Effect of Government Consumption

Listed author(s):
  • Ercolani, Valerio
  • Pavoni, Nicola

We study a largely neglected channel through which government expenditures boost private consumption. We set up a lifecycle model in which households are subject to health shocks. We estimate a negative impact of public health care on household consumption dispersion, wealth and saving. According to our model, this result is explained by a change in the level of precautionary saving, with public health care acting as a form of consumption insurance. We compute the implied consumption multipliers by simulating the typical government consumption shock within a calibrated general equilibrium version of our model, with flexible prices. The impact consumption multiplier generated by the decrease in the level of precautionary saving is positive and sizable. When we include the effect of taxation, the sign of the impact multiplier depends on a few features of the model, such as the persistence of the health shocks. The long-run cumulative multiplier is negative across all calibrations.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10067.

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Date of creation: Jul 2014
Handle: RePEc:cpr:ceprdp:10067
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  1. Rosella Levaggi & Francesco Menoncin, 2013. "Soft budget constraints in health care: evidence from Italy," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(5), pages 725-737, October.
  2. Edouard Challe & Xavier Ragot, 2011. "Fiscal Policy in a Tractable Liquidity‐Constrained Economy," Economic Journal, Royal Economic Society, vol. 121(551), pages 273-317, March.
  3. Daniel Shoag, 2013. "Using State Pension Shocks to Estimate Fiscal Multipliers since the Great Recession," American Economic Review, American Economic Association, vol. 103(3), pages 121-124, May.
  4. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
  5. Antonio Acconcia & Giancarlo Corsetti & Saverio Simonelli, 2014. "Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-experiment," American Economic Review, American Economic Association, vol. 104(7), pages 2185-2209, July.
  6. Francesco Giavazzi & Michael McMahon, 2012. "The Households Effects of Government Consumption," NBER Working Papers 17837, National Bureau of Economic Research, Inc.
  7. Omar Paccagnella & Vincenzo Rebba & Guglielmo Weber, 2008. "Voluntary Private Health Care Insurance Among the Over Fifties in Europe: A Comparative Analysis of SHARE Data," "Marco Fanno" Working Papers 0086, Dipartimento di Scienze Economiche "Marco Fanno".
  8. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
  9. Giordano, Raffaela & Momigliano, Sandro & Neri, Stefano & Perotti, Roberto, 2007. "The effects of fiscal policy in Italy: Evidence from a VAR model," European Journal of Political Economy, Elsevier, vol. 23(3), pages 707-733, September.
  10. Maffezzoli Marco, 2006. "Convergence Across Italian Regions and the Role of Technological Catch-Up," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-43, August.
  11. Fiorito, Riccardo & Kollintzas, Tryphon, 2004. "Public goods, merit goods, and the relation between private and government consumption," European Economic Review, Elsevier, vol. 48(6), pages 1367-1398, December.
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