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Default Risk, Interest Differentials and Fiscal Policy: A New Look at Crowding Out

Author

Listed:
  • David Bowles

    (BellSouth)

  • Holley Ulbrich

    (Clemson University)

  • Myles Wallace

    (Clemson University)

Abstract

The crowding out debate fails to incorporate the impact of expansionary policy on interest rates for private sector borrowing through changes in perceived default risk. In a modified IS-LM model with default risk dependent on the state of the economy, government borrowing has an indeterminate effect on interest rates for private borrowers; reduced default risk mitigates any crowding out effect. Testing the model with data from 1959-85 verifies a default risk effect for both monetary and fiscal policy. Expansionary policy reduces the spread between Baa corporate bonds and Treasury bonds of equal maturity.

Suggested Citation

  • David Bowles & Holley Ulbrich & Myles Wallace, 1989. "Default Risk, Interest Differentials and Fiscal Policy: A New Look at Crowding Out," Eastern Economic Journal, Eastern Economic Association, vol. 15(3), pages 203-212, Jul-Sep.
    • Handle: RePEc:eej:eeconj:v:15:y:1989:i:3:p:203-212
    as

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    File URL: http://web.holycross.edu/RePEc/eej/Archive/Volume15/V15N3P203_212.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. David Bowles & Holley Ulbrich & Myles Wallace, 1988. "Default Risk and the Effects of Fiscal Policy on Interest Rates: 1929–1945," Public Finance Review, , vol. 16(3), pages 357-373, July.
    2. Wisniewski, Tomasz Piotr & Lambe, Brendan John, 2015. "Does economic policy uncertainty drive CDS spreads?," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 447-458.
    3. Maria Carme Riera i Prunera, 2003. "Deficit, human capital and economic growth dynamics," Working Papers in Economics 102, Universitat de Barcelona. Espai de Recerca en Economia.

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