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

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

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
Date of revision:
Handle: RePEc:cpr:ceprdp:9520
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  1. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. repec:oup:qjecon:v:118:y:2003:i:4:p:1419-1447 is not listed on IDEAS
  3. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
  4. Raj Chetty & Emmanuel Saez, 2008. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Working Papers 14403, National Bureau of Economic Research, Inc.
  5. Lars-Erik Borge & Per Tovmo, 2009. "Myopic or Constrained by Balanced-Budget Rules? The Intertemporal Spending Behavior of Norwegian Local Governments," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 200-219, June.
  6. repec:oup:qjecon:v:111:y:1996:i:4:p:1081-1110 is not listed on IDEAS
  7. Poterba, James M., 1995. "Balanced Budget Rules and Fiscal Policy: Evidence From the States," National Tax Journal, National Tax Association, vol. 48(3), pages 329-36, September.
  8. Sorensen, Bent E. & Wu, Lisa & Yosha, Oved, 2001. "Output fluctuations and fiscal policy: U.S. state and local governments 1978-1994," European Economic Review, Elsevier, vol. 45(7), pages 1271-1310.
  9. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  10. Walter Nicholson Karen Needels, 2006. "Unemployment Insurance Strengthening the Relationship Between Theory and Policy," Mathematica Policy Research Reports 062881e2c70d4513829b70fee, Mathematica Policy Research.
  11. repec:mpr:mprres:5070 is not listed on IDEAS
  12. Aidt, T.S. & Veiga, F.J. & Veiga, L.G., 2009. "Election Results and Opportunistic Policies: A New Test of the Rational Political Business Cycle Model," Cambridge Working Papers in Economics 0934, Faculty of Economics, University of Cambridge.
  13. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  14. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 459-72, September.
  15. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  16. repec:oup:qjecon:v:112:y:1997:i:1:p:1-55 is not listed on IDEAS
  17. Gary Wagner & Russell Sobel, 2006. "State budget stabilization fund adoption: Preparing for the next recession or circumventing fiscal constraints?," Public Choice, Springer, vol. 126(1), pages 177-199, January.
  18. 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.
  19. Craig, Steven G. & Hoang, Edward C., 2011. "State government response to income fluctuations: Consumption, insurance, and capital expenditures," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 343-351, July.
  20. Walter Nicholson & Karen Needels, 2006. "Unemployment Insurance: Strengthening the Relationship between Theory and Policy," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 47-70, Summer.
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