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Fiscal Spending and Crowding out Effect: A Comparison between Developed and Developing Countries

  • Mahmoud Mahmoudzadeh


    (Department of Economics, Firoozkooh Branch, Islamic Azad University)

  • Somaye Sadeghi


    (Department of Economics, Firoozkooh Branch, Islamic Azad University)

  • Soraya Sadeghi


    (Department of Economics, Firoozkooh Branch, Islamic Azad University)

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    This paper evaluates the effect of disaggregated fiscal spending (consumption, capital formation and budget deficit) on private investment in both developed and developing countries using a panel data over the period of 2000-09. The results indicate that the elasticity of private investment with respect to government capital formation expenditure is positive in both groups (crowd in effect), but this complementary effect is greater than in the developed countries. Likewise, the elasticity of private investment with respect to government consumption spending is significantly negative in both groups (crowd out effect), but this substitution effect is larger in developed countries. Furthermore, the effect of budget deficit on private investment in developed countries is negative (crowd out effect), while this effect is positive in developing countries (crowd in effect). However, these effects are marginal in both groups.

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    Article provided by Faculty of Economics and Administration, University of Malaya in its journal Institutions and Economies (formerly known as International Journal of Institutions and Economies).

    Volume (Year): 5 (2013)
    Issue (Month): 1 (April)
    Pages: 31-40

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    Handle: RePEc:umk:journl:v:5:y:2013:i:1:p:31-40
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    9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    10. Anita Ghatak & Subrata Ghatak, . "Budgetary Deficits and Ricardian Equivalence: The Case of India, 1950-1986," Discussion Papers in Public Sector Economics 96/3, Department of Economics, University of Leicester.
    11. Mario I. Blejer & Mohsin S. Khan, 1984. "Government Policy and Private Investment in Developing Countries (Politique des pouvoirs publics et investissement privé dans les pays en développement) (Política estatal e inversión privada en lo," IMF Staff Papers, Palgrave Macmillan, vol. 31(2), pages 379-403, June.
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