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The impact of government debt on private consumption in OECD countries

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  • Berben, Robert-Paul
  • Brosens, Teunis

Abstract

Using data for 17 OECD countries from 1983 to 2003, this paper establishes a non-linear relationship between private consumption and the level of government debt. In countries with a high level of government debt, a fiscal expansion is partly crowded out by a fall in private consumption. In contrast, in low debt countries, private consumption is insensitive to changes in government debt. This means that fiscal policy will be less effective in stabilising business cycle fluctuations at higher levels of government debt.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 94 (2007)
Issue (Month): 2 (February)
Pages: 220-225

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Handle: RePEc:eee:ecolet:v:94:y:2007:i:2:p:220-225
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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Find related papers by JEL classification:
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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  1. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
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  7. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  8. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government Debt," Harvard Institute of Economic Research Working Papers 1820, Harvard - Institute of Economic Research.
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  9. Linnemann, Ludger & Schabert, Andreas, 2004. "Can fiscal spending stimulate private consumption?," Economics Letters, Elsevier, vol. 82(2), pages 173-179, February.
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  13. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  14. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
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  17. Lorenzo Pozzi & Freddy Heylen & Maarten Dossche, 2004. "Government Debt and Excess Sensitivity of Private Consumption: Estimates from OECD Countries," Economic Inquiry, Western Economic Association International, vol. 42(4), pages 618-633, October.
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Cited by:

  1. Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
  2. Cimadomo, Jacopo & Hauptmeier, Sebastian & Sola, Sergio, 2011. "Identifying the effects of government spending shocks with and without expected reversal: an approach based on U.S. real-time data," Working Paper Series 1361, European Central Bank.
  3. Cho, Dooyeon & Rhee, Dong-Eun, 2013. "Nonlinear effects of government debt on private consumption: Evidence from OECD countries," Economics Letters, Elsevier, vol. 121(3), pages 504-507.
  4. Andres Frick & Jochen Hartwig & Michael Graff & Boriss Siliverstovs, 2009. "Diskretionäre Fiskalpolitik: Pro und Kontra," KOF Analysen, KOF Swiss Economic Institute, ETH Zurich, vol. 3(2), pages 25-43, June.
  5. Schlicht, Ekkehart, 2008. "Public Debt as Private Wealth," Munich Reprints in Economics 2143, University of Munich, Department of Economics.
  6. Sergio Sola, 2013. "Temporary and Persistent Fiscal Policy Shocks," IHEID Working Papers 06-2013, Economics Section, The Graduate Institute of International Studies.
  7. Nickel, Christiane & Vansteenkiste, Isabel, 2008. "Fiscal policies, the current account and Ricardian equivalence," Working Paper Series 0935, European Central Bank.

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