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The Reaction of Private Spending and Market Interest Rates to the Changes in Public Spending

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  • Przekota Grzegorz
  • Lisowska Agnieszka

    (Koszalin University of Technology, Koszalin, Poland)

Abstract

Expansionary fiscal policy is mired in controversy. Its proponents suggest that during recession, it stimulates investors’ activity and has a stabilizing effect on economic growth. However, its opponents point to the costs associated with the budget deficit and public debt handling. Increased public spending may result in an increase in the interest rates, which may, in turn, hinder private investment and weaken the multiplier effect of public spending. The following study examines how private spending and market interest rates reacted to changes in public spending in Poland. The study has shown that public spending stimulates private spending, which is consistent with the Keynesian model, but it also leads to an increase in market interest rates, which is consistent with the neoclassical model.

Suggested Citation

  • Przekota Grzegorz & Lisowska Agnieszka, 2016. "The Reaction of Private Spending and Market Interest Rates to the Changes in Public Spending," Foundations of Management, Sciendo, vol. 8(1), pages 203-210, January.
    • Handle: RePEc:vrs:founma:v:8:y:2016:i:1:p:203-210:n:16
    DOI: 10.1515/fman-2016-0016
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    References listed on IDEAS

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    More about this item

    Keywords

    crowding out; public spending; private spending; interest rates; cointegration;
    All these keywords.

    JEL classification:

    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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