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

  • Steven Craig

    ()

    (University of Houston)

  • Wided Hemissi

    ()

    (University of Houston)

  • Satadru Mukherjee

    ()

    (University of Memphis)

  • Bent E. Sorensen

    ()

    (University of Houston)

This paper uses Carroll's (1992) buffer stock model to study government savings behavior exemplifi ed by the Unemployment Insurance (UI) programs of U.S. states from 1976 to 2008. We find strong empirical support for the model from regressions and simulations. Empirically, we fi nd that political consump- tion, defi ned in the context of the model from discretionary components of UI benefi ts and taxes, rises when savings and other spendable resources rises. We calibrate and simulate the model using the methodology pioneered by Jappelli, Padula, and Pistaferri (2008) and we find the model fits well. A key implica- tion is that intertemporal planning by governments is expressed by a trade-off between impatience (politicians' desire to immediately expend all savings) and risk aversion (politicians' fear of running out of resources to support UI). We quantify the amount of fiscal stimulus from the UI program under buffer stock saving.

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File URL: http://www.uh.edu/econpapers/RePEc/hou/wpaper/201302845.pdf
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Paper provided by Department of Economics, University of Houston in its series Working Papers with number 201302845.

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Date of creation: 20 Dec 2012
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Handle: RePEc:hou:wpaper:201302845
Contact details of provider: Postal: Houston TX 77023
Web page: http://www.uh.edu/class/economics/

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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. Fatás, Antonio & Mihov, Ilian, 2002. "The Case for Restricting Fiscal Policy Discretion," CEPR Discussion Papers 3277, C.E.P.R. Discussion Papers.
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  7. Walter Nicholson Karen Needels, 2006. "Unemployment Insurance Strengthening the Relationship Between Theory and Policy," Mathematica Policy Research Reports 062881e2c70d4513829b70fee, Mathematica Policy Research.
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  10. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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  12. repec:mpr:mprres:5070 is not listed on IDEAS
  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. 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.
  15. 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.
  16. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  17. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  18. 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.
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