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The Different Crowd Out Effects Of Tax Cut And Spending Deficits

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  • John J. HEIM

Abstract

Government deficits financed by domestic borrowing were found to crowd out private borrowing and spending by consumers and businesses, in both recession and non-recession periods. Deficits due to tax cuts had a net negative effect on GDP, because stimulus effects are smaller than the crowd out effects. Spending deficits had a zero net impact. This study provides first time econometric evidence that crowd out effects prevail during recessions, and that spending and tax cut deficits have different effects. International borrowing avoids the crowd out problem caused by national deficits by augmenting, rather than taking from, domestic saving.

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Bibliographic Info

Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 12 (2012)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:eaa:aeinde:v:12:y:2012:i:2_8

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Related research

Keywords: Consumption; Investment; Deficits; Savings; Crowd Out Stimulus;

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References

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  1. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
  2. William G. Gale & Peter R. Orszag, 2004. "Budget Deficits, National Saving, and Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 101-210.
  3. Benjamin M. Friedman, 1978. "Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 593-641.
  4. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  5. John J. Heim, 2010. "Do Government Deficits Crowd Out Consumer And Investment Spending?," Rensselaer Working Papers in Economics 1005, Rensselaer Polytechnic Institute, Department of Economics.
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Cited by:
  1. John J. Heim, 2013. "Does “Crowd Out” Offset The Stimulus Effect Of Government Deficits? A Large Scale Econometric Study," Rensselaer Working Papers in Economics 1301, Rensselaer Polytechnic Institute, Department of Economics.

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