Public debt and the effects of government expenditure on private consumption - A Kalman filter analysis of the Swedish experience 1970-1997

Recently, it has been suggested that the effect of government expenditure on private consumption is dependent on the level of public debt. More specifically, a higher public debt implies a less Keynesian response in private consumption. In this paper we investigate if this theory is supported by Swedish data 1970-1997 by estimating a consumption function allowing for time-varying parameters. Our main finding is that the effect of government expenditure has become less Keynesian over time. This coincides with a large increase in public debt, lending support to the theoretical predictions.