The Precautionary Saving Effect of Government Consumption

Nicola Pavoni and Valerio Ercolani

No 10067, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

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: 2014-07
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (7)

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Journal Article: The Precautionary Saving Effect of Government Consumption (2019)
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