The impact of government debt on private consumption in OECD countries

Abstract

This paper establishes a non-linear relationship between private consumption and government debt. In OECD-countries with high government debt, a fiscal expansion is partly crowded out by a fall in private consumption. In contrast, in low debt countries, private consumption is insensitive to changes in government debt. Thus fiscal policy is less effective in stabilising business cycle fluctuations at higher levels of government debt.