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The B.E. Journal of Macroeconomics

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The Precautionary Saving Effect of Government Consumption

Valerio Ercolani
  • Bank of Italy, Directorate General for Economics, Statistics and Research, Via Nazionale, 91, 00184 Rome, Italy
  • Other articles by this author:
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/ Nicola Pavoni
Published Online: 2018-10-20 | DOI: https://doi.org/10.1515/bejm-2017-0147

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

JEL Classification: E21; E32; E62

Article Note:

Valerio Ercolani acknowledges that part of the work was carried out while he was working at Bank of Portugal.

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About the article

Published Online: 2018-10-20


Citation Information: The B.E. Journal of Macroeconomics, 20170147, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2017-0147.

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