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The economics of crowding out

  • Simon Benninga

    (Hebrew University of Jerusalem, Israel)

  • Uri M. Possen

    (Cornell University, USA)

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    We consider fiscal policy in a non-monetary, general equilibrium framework with uncertainty, in which the financing of the government budget has no effects. We show that »crowding out» and »crowding in» depend on whether the fiscal policy requires a gestation period or whether its effect is contemporaneous with the taxation by which it is financed. The optimality conditions and the comparative statics of the equilibrium are entirely different for these two cases. In addition to this timing question, the optimality conditions depend on whether the public good has infrastructure effects and/or has intrinsic utility.

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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 4 (1991)
    Issue (Month): 1 (Spring)
    Pages: 10-23

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    Handle: RePEc:fep:journl:v:4:y:1991:i:1:p:10-23
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    1. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Grossman, Herschel I & Lucas, Robert F, 1974. "The Macro-Economic Effects of Productive Public Expenditures," The Manchester School of Economic & Social Studies, University of Manchester, vol. 42(2), pages 162-70, June.
    4. Kenneth L. Judd, 1983. "Short-Run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Discussion Papers 559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Andrew B. Abel, 1988. "The Implications of Insurance for the Efficacy of Fiscal Policy," NBER Working Papers 2517, National Bureau of Economic Research, Inc.
    6. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    7. Benninga, Simon & Protopapadakis, Aris, 1986. "General equilibrium properties of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 16(3), pages 389-410, July.
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