Government Debt and Excess Sensitivity of Private Consumption: Estimates from OECD Countries

Lorenzo Pozzi, Freddy Heylen and Maarten Dossche

Economic Inquiry, 2004, vol. 42, issue 4, 618-633

Abstract: This article investigates the role of government debt in the degree of excess sensitivity of private consumption to current disposable income. Because this type of excess sensitivity is generally attributed to liquidity constraints, this amounts to a test of the impact of government debt on the amount of credit extended to individuals. Controlling for financial liberalization we find that, for a panel of OECD countries in the 1990s, a high government debt leads to more excess sensitivity. This result supports the idea that a high government debt induces lenders to tighten credit conditions. Our findings survive several robustness checks. (JEL E21, E62, C33) Copyright 2004, Oxford University Press.

JEL-codes: C33 E21 E62 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (14)

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