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Dynamic implications of fiscal policy: Crowding-out or crowding-in?

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  • Bilgili, Faik

Abstract

The purpose of this paper is to analyze the short run and long run effects of fiscal policy. The classical-Harrodian model developed in Moudud (2000, 1999), which is an extension of Shaikh (1995, 1992, 1991), provides a demonstration of dynamic fiscal policy context. It asserts that the there is a crowding in of output growth in the short run. In the long run, however, the impact of government spending is subject to change under some circumstances of capital utilization, normal profit rate and social savings rate. Blinder and Solow (1973), using IS-LM model, reveal that bond-financed fiscal expansion does not engender a complete crowding out. Friedman (1978, 1985) notices the possibility of crowding-in. Crowding-out or crowding-in debate can be extended to other economists. Blanchard and Perotti (1999) and Easterly and Rebelo (1993) reach crowding-in results. Bairam and Ward (1993) find crowding-out of private investment. Barro (1989, 1999) and Kormendi and Meguire (1985) obtain either a negative or no effect of government spending on the growth, whereas the works of Argimon et al. (1997), Devarajan et al. (1996) and Ahmed and Miller (2000) have mixed results. This study runs VECM models and impulse response analysis to juxtapose the crowding in/out effects of fiscal policy. Investigating the short run and long-run implications of fiscal policy for the Turkish economy, this paper concludes that government investments crowd out, whereas its current expenditures crowd in the private investment.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24111.

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Date of creation: 07 Jul 2003
Date of revision: 25 Dec 2009
Handle: RePEc:pra:mprapa:24111

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Keywords: Fiscal policy; crowding-in; crowding-out; cointegration; VECM;

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References

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  1. 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.
  2. Habib Ahmed & Stephen M. Miller, 1999. "Crowding-Out and Crowding-In Effects of the Components of Government Expenditure," Working papers 1999-02, University of Connecticut, Department of Economics.
  3. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  4. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  5. Aivazian, Varouj A. & Callen, Jeffrey L. & Krinsky, Itzhak & Kwan, Clarence C. Y., 1990. "Risk versus return in the substitutability of debt and equity securities," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 161-178, August.
  6. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1996. "The composition of public expenditure and economic growth," CEMA Working Papers 77, China Economics and Management Academy, Central University of Finance and Economics.
  7. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
  8. Anwar M. Shaikh, 1995. "The Stock Market and the Corporate Sector: Profit-Based Approach," Economics Working Paper Archive wp_146, Levy Economics Institute.
  9. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
  10. 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.
  11. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  12. Stpehen M. Miller & Frank S. Russek, 1993. "Fiscal Structures and Economic Growth: International Evidence," Macroeconomics 9309001, EconWPA, revised 23 Sep 1993.
  13. Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
  14. Ewing, Bradley T., 2003. "The response of the default risk premium to macroeconomic shocks," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 261-272.
  15. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  16. H. Ahmed & SM. Miller, 2000. "Crowding-out and crowding-in effects of the components of government expenditure," Contemporary Economic Policy, Western Economic Association International, vol. 18(1), pages 124-133, 01.
  17. Barry, Frank & Devereux, Michael B., 2003. "Expansionary fiscal contraction: A theoretical exploration," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 1-23, March.
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Cited by:
  1. Bilgili, Faik, 2006. "Random walk, excess smoothness or excess sensitivity? Evidence from literature and an application for Turkish economy," MPRA Paper 24086, University Library of Munich, Germany, revised 14 Jul 2010.

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