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The Impact of Government Debt on Private Consumption in OECD Countries

  • Robert-Paul Berben
  • Teunis Brosens

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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File URL: http://www.dnb.nl/binaries/Working%20Paper%2045_tcm46-146702.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 045.

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Date of creation: Jun 2005
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Handle: RePEc:dnb:dnbwpp:045
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Web page: http://www.dnb.nl/en/

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  1. Becker, Torbjorn, 1997. "An investigation of Ricardian equivalence in a common trends model," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 405-431, August.
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  3. 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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  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  7. Alexander Ludwig & Torsten Sløk, 2002. "The Impact of Changes in Stock Prices and House Priceson Consumption in OECD Countries," IMF Working Papers 02/1, International Monetary Fund.
  8. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  9. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
  10. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  11. G. Peersman & L. Pozzi, 2004. "Determinants of consumption smoothing," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/231, Ghent University, Faculty of Economics and Business Administration.
  12. Bertola, Giuseppe & Drazen, Allan, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," CEPR Discussion Papers 599, C.E.P.R. Discussion Papers.
  13. 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.
  14. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
  15. Luiz de Mello & Per Mathis Kongsrud & Robert W.R. Price, 2004. "Saving Behaviour and the Effectiveness of Fiscal Policy," OECD Economics Department Working Papers 397, OECD Publishing.
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  17. Yongcheol Shin & Ron P Smith & Mohammad Hashem Pesaran, 1998. "Pooled Mean Group Estimation of Dynamic Heterogeneous Panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
  18. 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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