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

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  • Giuseppe Nicoletti

Abstract

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 ...

Suggested Citation

  • Giuseppe Nicoletti, 1988. "Private Consumption, Inflation and the "Debt Neutrality Hypothesis": The Case of Eight OECD Countries," OECD Economics Department Working Papers 50, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:50-en
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    File URL: http://dx.doi.org/10.1787/012554655282
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    References listed on IDEAS

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    1. Dan Andrews & Federico Cingano, 2014. "Public policy and resource allocation: evidence from firms in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 29(78), pages 253-296, April.
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    Cited by:

    1. Giuseppe Nicoletti, 1991. "Consommation privée et endettement public en Italie et en Belgique : existe-t-il une relation stable ?," Revue de l'OFCE, Programme National Persée, vol. 37(1), pages 79-121.
    2. Giavazzi, Francesco & Jappelli, Tullio & Pagano, Marco, 2000. "Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries," European Economic Review, Elsevier, vol. 44(7), pages 1259-1289, June.
    3. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, "undated". "Searching for Non-Keynesian Effects of Fiscal Policy," Working Papers 136, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Hürtgen, Patrick & Rühmkorf, Ronald, 2014. "Sovereign default risk and state-dependent twin deficits," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 357-382.
    5. POZZI Lorenzo & HEYLEN Freddy & DOSSCHE Maarten, "undated". "Government Debt and the Excess Sensitivity of Private Consumption to Current Income: An Empirical Analysis for OECD Countries," EcoMod2003 330700125, EcoMod.

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