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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
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Handle: RePEc:cpr:ceprdp:9520
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  1. 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.
  2. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
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  7. Saez, Emmanuel & Chetty, Nadarajan, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," Scholarly Articles 9696326, Harvard University Department of Economics.
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  13. repec:mpr:mprres:5070 is not listed on IDEAS
  14. 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.
  15. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
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  17. Lars-Erik Borge & Per Tovmo, 2007. "Myopic or constrained by balanced-budget-rules? The intertemporal spending behavior of Norwegian local governments," Working Paper Series 8807, Department of Economics, Norwegian University of Science and Technology.
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