The Precautionary Saving Effect of Government Consumption

Valerio Ercolani and Nicola Pavoni

The B.E. Journal of Macroeconomics, 2019, vol. 19, issue 1, 32

Abstract: We study a largely neglected channel through which government expenditures can boost private consumption. We set up a dynamic model in which households are subject to health shocks. We take the model to the data and 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.

Keywords: consumption multipliers; government expenditure by function; precautionary saving (search for similar items in EconPapers)
JEL-codes: E21 E32 E62 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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Working Paper: The Precautionary Saving Effect of Government Consumption (2014)
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DOI: 10.1515/bejm-2017-0147

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