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Impact of Public Debt, Deficit and Debt Financing on Private Investment in a Large Country: Evidence from the United States

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  • Amir Kia

    () (Finance and Economics Department, Utah Valley University)

Abstract

This paper analyses the direct impact of fiscal variables on private investment. The current literature ignores one or more fiscal variables and, in many cases, the foreign financing of debt. In this paper, an aggregate investment function for an economy in which firms incur adjustment costs in their investment process is developed. The developed model incorporates the direct impact of government expenditure, public debt and investment, deficits and foreign-financed debt on private investment. The model is tested on US data. It is found that public investment does not have any impact on private investment, but government expenditure, deficit, debt and foreign-financed debt crowd out private investment over the long run. However, deficit crowds in the private investment over the short run.

Suggested Citation

  • Amir Kia, 2020. "Impact of Public Debt, Deficit and Debt Financing on Private Investment in a Large Country: Evidence from the United States," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 6(2), pages 139-161, December.
  • Handle: RePEc:ana:journl:v:6:y:2020:i:2:p:139-161
    DOI: 10.22440/wjae.6.2.3
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    File URL: https://journal.econworld.org/index.php/econworld/article/view/149/57
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    More about this item

    Keywords

    Private investment; Public debt; Deficit; Foreign-financed debt; Adjustment cost;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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