Government Debt and Excess Sensitivity of Private Consumption: Estimates from OECD Countries |
| |
| Authors: | Lorenzo Pozzi Freddy Heylen Maarten Dossche |
| |
| Affiliation: | Pozzi:;Postdoctoral Fellow of the Fund for Scientific Research, Flanders (Belgium), and Sherppa, Ghent University, Hoveniersberg 24, 9000 Gent, Belgium. Phone 32–9–2643483, Fax 32–9–2648996, E-mail Heylen:;Professor, Sherppa, Ghent University, Hoveniersberg 24, 9000 Gent, Belgium. Phone 32–9–2643485, Fax 32–9–2648996, E-mail Dossche:;Research Assistant, National Bank of Belgium and Sherppa, Ghent University, Hoveniersberg 24, 9000 Gent, Belgium. Phone 32–9–2643483, Fax 32–9–2648996, E-mail |
| |
| 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. |
| |
| Keywords: | |
|
|
