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Private Consumption, Inflation and the "Debt Neutrality Hypothesis": The Case of Eight OECD Countries

  • Giuseppe Nicoletti

This paper examines the empirical basis for the debt-neutrality hypothesis in an international cross-section of eight major OECD countries over the period 1961-85. The analysis uses a dynamic demand system for durable and non-durable goods derived from individual optimizing behaviour. The model nests three specifications corresponding to different degrees of consumer rationality: the traditional life-cycle consumption model, the case of inflation-adjustment of disposable income (no money illusion) and the case of full "tax discounting" (no fiscal illusion). In addition, the model incorporates explicitly the role of a variable interest rate and substitution between public and private consumption. The model is estimated using three different consumption aggregates at the single-country level and over the pooled data set. Estimates of the inflation-adjustment and fiscal illusion parameters are provided and specification tests opposing the three versions of the model are performed. The ... Cette étude analyse, de façon empirique, l'hypothèse de neutralité de la dette publique, à partir de données internationales couvrant huit pays de l'OCDE et portant sur la période 1961-85. L'analyse se base sur un modèle dynamique de demande de biens durables et non durables, fondé sur un comportement de maximisation des consommateurs. Le modèle inclut trois spécifications correspondant à divers degrés de rationalité des consommateurs : le cas traditionnel de cycle de vie, le cas où le revenu disponible est corrigé des effets d'érosion dûs à l'inflation (absence d'illusion monétaire) et le cas où les consommateurs prévoient les taxes futures associées au service de la dette publique (absence d'illusion fiscale). Le modèle introduit explicitement l'influence du taux d'intérêt réel et la possibilité d'une substitution entre consommation publique et privée. Les estimations utilisent trois agrégats différents pour la consommation et sont effectuées pour chacun des pays et sur ...

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 50.

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Date of creation: Jan 1988
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Handle: RePEc:oec:ecoaaa:50-en
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