Policy Uncertainty and Precautionary Savings

38 Pages Posted: 4 Apr 2008 Last revised: 5 Jan 2022

See all articles by Francesco Giavazzi

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

In 1997 Chancellor Kohl proposed a major pension reform and 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 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

Suggested Citation

Giavazzi, Francesco and Giavazzi, Francesco and McMahon, Michael F., Policy Uncertainty and Precautionary Savings (April 2008). NBER Working Paper No. w13911, Available at SSRN: https://ssrn.com/abstract=1116587

Francesco Giavazzi (Contact Author)

National Bureau of Economic Research (NBER)

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University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

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Centre for Economic Policy Research (CEPR)

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Michael F. McMahon

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

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London, WC2A 2AE
United Kingdom

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