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Title: Household Response to Government Debt: Evidence from Life Insurance Holdings

Citation Type: Journal Article

Publication Year: 2015

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Abstract: We use state-level panel data on life insurance in force in the United Statesand nd that a $1 increase in government debt, at either the state or federallevel is associated with a $0.96 increase in the face value of the averagelife insurance holdings per capita for a household in the average state. Thisincrease represents an intention to save that would almost completely offsetthe government debt in specic states of the world (i.e., if the insured dies).Because this state of the world is rare, the immediate increase in actualsavings is only about $0.03, the cost of the additional insurance. We nd, inaddition, that this response occurs mainly on the intensive margin, meaningthat the size of the average life insurance policy increases when governmentdebt increases. Along the extensive margin, we nd the number of policiesin force falls slightly with federal debt, and rises slightly with state debtincreases. The results show altruistic planning in response to changes ingovernment debt that are consistent with Ricardian Equivalence and thelong-run neutrality of government debt.

Url: http://onlinelibrary.wiley.com/doi/10.1111/jmcb.12234/epdf

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Authors: Craig, Steven G.; Hoang, Edward C.; Vollrath, Dietrich

Periodical (Full): Journal of Money, Credit and Banking

Issue: 5

Volume: 47

Pages: 819-845

Data Collections: IPUMS CPS

Topics: Methodology and Data Collection, Other

Countries: United States