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Government Debt and Excess Sensitivity of Private Consumption: Estimates from OECD Countries
Author(s) -
Pozzi Lorenzo,
Heylen Freddy,
Dossche Maarten
Publication year - 2004
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbh085
Subject(s) - economics , government debt , monetary economics , debt , consumption (sociology) , market liquidity , private consumption , internal debt , robustness (evolution) , government (linguistics) , macroeconomics , fiscal policy , social science , biochemistry , chemistry , linguistics , philosophy , sociology , gene
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.