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Federal Reserve Bank of Minneapolis
Staff Report
Macroeconomic Effects of Medicare
Juan Carlos Conesa
Daniela Costa
Parisa Kamali
Timothy J. Kehoe
Vegard Nygard
Gajen Raveendranathan
Akshar Saxena
Abstract

This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We find that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we find lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we find that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.


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Juan Carlos Conesa & Daniela Costa & Parisa Kamali & Timothy J. Kehoe & Vegard Nygard & Gajen Raveendranathan & Akshar Saxena, Macroeconomic Effects of Medicare, Federal Reserve Bank of Minneapolis, Staff Report 548, 27 Apr 2017.
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Keywords: Medicare; Medicaid; Overlapping generations; Steady state; Transition path
DOI: 10.21034/sr.548
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