Using data for 17 OECD countries from 1983 to 2003, this paper establishes a non-linear relationship between private consumption and the level of government debt. In countries with a high level of 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. This means that fiscal policy will be less effective in stabilising business cycle fluctuations at higher levels of government debt.
Article in Economics Letters 94(2), written with Robert-Paul Berben.