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The economics of crowding out

Author

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  • Simon Benninga

    (Hebrew University of Jerusalem, Israel)

  • Uri M. Possen

    (Cornell University, USA)

Abstract

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.

Suggested Citation

  • Simon Benninga & Uri M. Possen, 1991. "The economics of crowding out," Finnish Economic Papers, Finnish Economic Association, vol. 4(1), pages 10-23, Spring.
  • Handle: RePEc:fep:journl:v:4:y:1991:i:1:p:10-23
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    References listed on IDEAS

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    1. 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..
    2. Judd, Kenneth L, 1985. "Short-run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 298-319, April.
    3. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, pages 177-200.
    4. Andrew B. Abel, "undated". "The Implications of Insurance for the Efficacy of Fiscal Policy," Rodney L. White Center for Financial Research Working Papers 6-88, Wharton School Rodney L. White Center for Financial Research.
    5. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    6. 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.
    7. 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 162-170, June.
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