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Policy uncertainty and precautionary savings

Giavazzi, Francesco and McMahon, Michael (2008) Policy uncertainty and precautionary savings. CEPDP, 863. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853282594

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Abstract

In 1997 Chancellor Kohl proposed a major pension reform: he pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law - one that is crucial for our identification strategy - is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke of the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labor market choices: we find evidence of a labor supply response by those workers who can use the margin offered by part-time employment.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2008 the authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HV Social pathology. Social and public welfare. Criminology
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 863
Date Deposited: 17 Jul 2008 14:29
URL: http://eprints.lse.ac.uk/19608/

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