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When Does Government Debt Crowd Out Investment?

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  • Nora Traum
  • Shu‐Chun S. Yang

Abstract

We examine when government debt crowds out investment for the US economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced‐form regressions are inconclusive about crowding out. At longer horizons, distortionary financing is important for the negative investment response to debt. Copyright © 2013 John Wiley & Sons, Ltd.

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  • Nora Traum & Shu‐Chun S. Yang, 2015. "When Does Government Debt Crowd Out Investment?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(1), pages 24-45, January.
  • Handle: RePEc:wly:japmet:v:30:y:2015:i:1:p:24-45
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    Cited by:

    1. Wang, Ren & Hou, Jie & He, Xiaobei, 2017. "Real estate price and heterogeneous investment behavior in China," Economic Modelling, Elsevier, vol. 60(C), pages 271-280.
    2. Anna Kormilitsina & Sarah Zubairy, 2018. "Propagation Mechanisms for Government Spending Shocks: A Bayesian Comparison," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1571-1616, October.
    3. repec:eee:deveco:v:133:y:2018:i:c:p:201-219 is not listed on IDEAS
    4. Bi, Huixin & Shen, Wenyi & Yang, Shu-Chun S., 2016. "Debt-dependent effects of fiscal expansions," European Economic Review, Elsevier, vol. 88(C), pages 142-157.
    5. Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, American Economic Association, vol. 107(8), pages 2409-2454, August.
    6. Bermperoglou, Dimitrios & Pappa, Evi & Vella, Eugenia, 2017. "The government wage bill and private activity," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 21-47.
    7. Shen, Wenyi & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2018. "Government spending effects in low-income countries," Journal of Development Economics, Elsevier, vol. 133(C), pages 201-219.
    8. Bhattarai, Keshab & Trzeciakiewicz, Dawid, 2017. "Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis," Economic Modelling, Elsevier, vol. 61(C), pages 321-338.
    9. Borsoi, Nicolas da Silva & Teles, Vladimir Kühl, 2018. "Fiscal multipliers in bad times: does the nature of a recession matter?," Textos para discussão 492, FGV EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    10. repec:eee:ecmode:v:64:y:2017:i:c:p:473-486 is not listed on IDEAS
    11. Fløgstad, Cathrin, 2017. "Domestic bond markets in emerging economies: Crowding in or crowding out?," Working Papers in Economics 15/17, University of Bergen, Department of Economics.
    12. repec:eee:dyncon:v:93:y:2018:i:c:p:260-276 is not listed on IDEAS

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