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The Impact of Government Debt on Private Consumption in OECD Countries

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  • Robert-Paul Berben
  • Teunis Brosens

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.

Suggested Citation

  • Robert-Paul Berben & Teunis Brosens, 2005. "The Impact of Government Debt on Private Consumption in OECD Countries," DNB Working Papers 045, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:045
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    File URL: https://www.dnb.nl/binaries/Working%20Paper%2045_tcm46-146702.pdf
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    References listed on IDEAS

    as
    1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
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    8. 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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    13. Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, vol. 65(2), pages 147-162, August.
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    Cited by:

    1. Sergio Sola, 2013. "Temporary and Persistent Fiscal Policy Shocks," IHEID Working Papers 06-2013, Economics Section, The Graduate Institute of International Studies.
    2. Vansteenkiste, Isabel & Nickel, Christiane, 2008. "Fiscal policies, the current account and Ricardian equivalence," Working Paper Series 935, European Central Bank.
    3. Ekkehart Schlicht, 2006. "Public Debt As Private Wealth: Some Equilibrium Considerations," Metroeconomica, Wiley Blackwell, vol. 57(4), pages 494-520, November.
    4. Jacopo Cimadomo & Sebastian Hauptmeier & Sergio Sola, 2011. "Identifying the Effects of Government Spending Shocks with and without Expected Reversal: an Approach Based on U.S. Real-Time Data," IHEID Working Papers 12-2011, Economics Section, The Graduate Institute of International Studies.
    5. 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.
    6. 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.

    More about this item

    Keywords

    consumption; government debt; panel data;

    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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