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Budget Deficits, Public Spending and Interest Rates in Thailand

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  • Michael Kuehlwein

    (Pomona College)

  • Sansern Samalapa

Abstract

Some theory suggests that budget deficits and greater public spending will raise real interest rates and crowd-out private investment; other theory suggests there is no effect. We attempt to test this in the Thai economy between the years 1978 and 1994. We find that budget deficits did appear to raise real interest rates during our sample period. Our estimates also suggest that, holding the deficit constant, Thai government current and construction expenditure did not raise real interest rates and that Thai government equipment expenditure lowered them. We try to explain the last result with a framework similar to Barro's (1981) but expanded to include foreign trade and borrowing. Foreign borrowing alleviates the pressure on real interest rates to rise, and, under certain conditions, allows them to fall. We find support for this hypothesis from regression results that suggest that, during our sample period, Thai government equipment expenditure was heavily financed from abroad. The results imply that public investment programs in developing countries that do not boost budget deficits and obtain some foreign financing may not crowd-out private investment and could be a promising means of promoting capital formation.

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Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 1999-34.

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Handle: RePEc:clm:clmeco:1999-34

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  1. Nelson, C. & Startz, R., 1988. "The Distribution Of The Instrumental Variables Estimator And Its T-Ratio When The Instrument Is A Poor One," Working Papers 88-07, University of Washington, Department of Economics.
  2. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  4. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
  5. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  6. Isabel Argimon & Jose Gonzalez-Paramo & Jose Roldan, 1997. "Evidence of public spending crowding-out from a panel of OECD countries," Applied Economics, Taylor & Francis Journals, vol. 29(8), pages 1001-1010.
  7. Robert E. Hall, 1979. "Labor Supply and Aggregate Fluctuations," NBER Working Papers 0385, National Bureau of Economic Research, Inc.
  8. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
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Cited by:
  1. Anthony Bende-Nabende & Jim Slater, 2003. "Private capital formation: Short- and long-run crowding-in (out) effects in ASEAN, 1971-99," Economics Bulletin, AccessEcon, vol. 3(28), pages 1-16.

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