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Does Government Debt Crowd Out Investment? A Bayesian DSGE Approach: Working Paper 2010-02

  • Nora Traum
  • Shu-Chun Susan Yang

We estimate the crowding-out effects of government debt for the U.S. economy using a New Keynesian model with a detailed fiscal specification. The estimation accounts for the interaction between monetary and fiscal policies. Whether private investment is crowded in or out in the short term depends on the fiscal or monetary shock that triggers debt expansion. Contrary to the conventional view of crowding out, no systematic relationship among debt, the real interest rate, and invest ment exists. At longer horizons, distortionary financing is important for the negative investment response to a

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Paper provided by Congressional Budget Office in its series Working Papers with number 21397.

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Date of creation: 15 Apr 2010
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Handle: RePEc:cbo:wpaper:21397
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