The Precautionary Saving Effect of Government Consumption

We provide new evidence on the reaction of private consumption to government consumption changes focusing on a specific channel: the precautionary saving motive. We first build a unique panel dataset which links household's private consumption to the government consumption of the region where the household lives, for Italy. We then use regional and time variability of government consumption and measure its effect on individual consumption, for different categories of government expenditures. We estimate a negative impact of public health care on household consumption dispersion. Within our model where individuals are subject to health shocks, this result is interpreted in the light of a precautionary saving motive, with public health care expenditures acting as a form of consumption insurance for households. We then compute the implied consumption multipliers by calibrating an RBC model with heterogeneous agents based on our estimates. The size of the multipliers varies with the persistence of the health shocks. In the benchmark case with persistent health shocks, the consumption multiplier amounts to 0:73 on impact and to -1:49 in the long run.