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Fiscal Spending and Crowding out Effect: A Comparison between Developed and Developing Countries

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Author Info

  • Mahmoud Mahmoudzadeh

    ()
    (Department of Economics, Firoozkooh Branch, Islamic Azad University)

  • Somaye Sadeghi

    ()
    (Department of Economics, Firoozkooh Branch, Islamic Azad University)

  • Soraya Sadeghi

    ()
    (Department of Economics, Firoozkooh Branch, Islamic Azad University)

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    Abstract

    This paper evaluates the effect of disaggregated fiscal spending (consumption, capital formation and budget deficit) on private investment in both developed and developing countries using a panel data over the period of 2000-09. The results indicate that the elasticity of private investment with respect to government capital formation expenditure is positive in both groups (crowd in effect), but this complementary effect is greater than in the developed countries. Likewise, the elasticity of private investment with respect to government consumption spending is significantly negative in both groups (crowd out effect), but this substitution effect is larger in developed countries. Furthermore, the effect of budget deficit on private investment in developed countries is negative (crowd out effect), while this effect is positive in developing countries (crowd in effect). However, these effects are marginal in both groups.

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    File URL: http://ijie.um.edu.my/filebank/published_article/4729/Fulltext2.pdf
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    Bibliographic Info

    Article provided by Faculty of Economics and Administration, University of Malaya in its journal Institutions and Economies (formerly known as International Journal of Institutions and Economies).

    Volume (Year): 5 (2013)
    Issue (Month): 1 (April)
    Pages: 31-40

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    Handle: RePEc:umk:journl:v:5:y:2013:i:1:p:31-40

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    Related research

    Keywords: budget deficit; government expenditures; private investment;

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    1. Ganelli, Giovanni, 2003. "Useful government spending, direct crowding-out and fiscal policy interdependence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 87-103, February.
    2. Afonso, António & St. Aubyn, Miguel, 2008. "Macroeconomic rates of return of public and private investment: crowding-in and crowding-out effects," Working Paper Series 0864, European Central Bank.
    3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    4. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    5. Barro, Robert J., 1978. "Comment from an unreconstructed Ricardian," Journal of Monetary Economics, Elsevier, vol. 4(3), pages 569-581, August.
    6. Anita Ghatak & Subrata Ghatak, . "Budgetary Deficits and Ricardian Equivalence: The Case of India, 1950-1986," Discussion Papers in Public Sector Economics 96/3, Department of Economics, University of Leicester.
    7. Beck, Stacie E., 1993. "The Ricardian equivalence proposition: evidence from foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 154-169, April.
    8. Ghatak, Anita & Ghatak, Subrata, 1996. "Budgetary deficits and Ricardian equivalence: The case of India, 1950-1986," Journal of Public Economics, Elsevier, vol. 60(2), pages 267-282, May.
    9. Baotai Wang, 2005. "Effects of government expenditure on private investment: Canadian empirical evidence," Empirical Economics, Springer, vol. 30(2), pages 493-504, 09.
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