Working Paper: CEPR ID: DP10067
Authors: Valerio Ercolani; Nicola Pavoni
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
JEL Codes: E21; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government consumption (E20) | Household consumption dispersion (D19) |
| Public health care expenditures (H51) | Household consumption dispersion (D19) |
| Household consumption dispersion (D19) | Current private consumption (D19) |
| Decrease in consumption dispersion (E21) | Reduced precautionary savings (E21) |
| Current private consumption (D19) | Total long-run cumulative multiplier (E19) |
| Public health care expenditures (H51) | Current private consumption (D19) |