Discussion Paper Details

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

Author(s): Steven G. Craig, Wided Hemissi, Satadru Mukherjee and Bent E Sørensen

Publication Date: June 2013

Keyword(s): forward looking politicians, impatience and precautionary saving

Programme Area(s): International Macroeconomics and Public Economics

Abstract: 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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Bibliographic Reference

Craig, S, Hemissi, W, Mukherjee, S and Sørensen, B. 2013. 'How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance'. London, Centre for Economic Policy Research.