Discussion Paper Details

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Title: The Precautionary Saving Effect of Government Consumption

Author(s): Valerio Ercolani and Nicola Pavoni

Publication Date: July 2014

Keyword(s): consumption multipliers, government expenditure by function and precautionary saving

Programme Area(s): International Macroeconomics and Public Economics

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.

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Bibliographic Reference

Ercolani, V and Pavoni, N. 2014. 'The Precautionary Saving Effect of Government Consumption'. London, Centre for Economic Policy Research.