How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance

This paper uses Carroll's (1992) buffer stock model to study government savings behavior exemplifi ed by the Unemployment Insurance (UI) programs of U.S. states from 1976 to 2008. We find strong empirical support for the model from regressions and simulations. Empirically, we fi nd that political consump- tion, defi ned in the context of the model from discretionary components of UI benefi ts and taxes, rises when savings and other spendable resources rises. We calibrate and simulate the model using the methodology pioneered by Jappelli, Padula, and Pistaferri (2008) and we find the model fits well. A key implica- tion is that intertemporal planning by governments is expressed by a trade-off between impatience (politicians' desire to immediately expend all savings) and risk aversion (politicians' fear of running out of resources to support UI). We quantify the amount of fiscal stimulus from the UI program under buffer stock saving.