Working Paper: CEPR ID: DP9520
Authors: Steven G. Craig; Wided Hemissi; Satadru Mukherjee; Bent E. Sørensen
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.
Keywords: Forward looking politicians; Impatience; Precautionary saving
JEL Codes: E21; H11; H74
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high savings (D14) | increase benefits (H55) |
| high savings (D14) | lower taxes (H29) |
| low savings (D14) | cut benefits (H53) |
| low savings (D14) | raise taxes (H29) |