Theoretical literature identifies two variants of crowding out in an economy-real and financial. The real (direct) crowding out occurs when the increase in public investment displaces private capital formation broadly on a dollar-for-dollar basis, irrespective of the mode of financing the fiscal deficit. The financial crowding out is the phenomenon of partial loss of private capital formation, due to the increase in the interest rates emanating from the pre-emption of real and financial resources by the government through bond-financing of fiscal deficit. The paper analysed the real and financial crowding out in India during 1970-71 to 2002-03. Using asymmetric vector autoregressive model, the paper finds no real crowding out between public (in particular, infrastructure) and private investment; rather complementarily is observed between the two. The dynamics of financial crowding out is captured through the dual transmission mechanism via real rate of interest; that is, whether private capital formation is interest rate sensitive and in turn whether the rise in real rate of interest is induced by fiscal deficit. The study found empirical evidence for the former, but not the latter, reinforcing no financial crowding out in India.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number
43.
Find related papers by JEL classification: E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models H6 - Public Economics - - National Budget, Deficit, and Debt