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Budget Deficits, Public Spending and Interest Rates in Thailand

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  • Michael Kuehlwein

    (Pomona College)

  • Sansern Samalapa

Abstract

Some theory suggests that budget deficits and greater public spending will raise real interest rates and crowd-out private investment; other theory suggests there is no effect. We attempt to test this in the Thai economy between the years 1978 and 1994. We find that budget deficits did appear to raise real interest rates during our sample period. Our estimates also suggest that, holding the deficit constant, Thai government current and construction expenditure did not raise real interest rates and that Thai government equipment expenditure lowered them. We try to explain the last result with a framework similar to Barro's (1981) but expanded to include foreign trade and borrowing. Foreign borrowing alleviates the pressure on real interest rates to rise, and, under certain conditions, allows them to fall. We find support for this hypothesis from regression results that suggest that, during our sample period, Thai government equipment expenditure was heavily financed from abroad. The results imply that public investment programs in developing countries that do not boost budget deficits and obtain some foreign financing may not crowd-out private investment and could be a promising means of promoting capital formation.

Suggested Citation

  • Michael Kuehlwein & Sansern Samalapa, "undated". "Budget Deficits, Public Spending and Interest Rates in Thailand," Claremont Colleges Working Papers 1999-34, Claremont Colleges.
  • Handle: RePEc:clm:clmeco:1999-34
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    File URL: http://www.claremontmckenna.edu/rdschool/papers/1999-34.pdf
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    References listed on IDEAS

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    1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    3. Isabel Argimon & Jose Gonzalez-Paramo & Jose Roldan, 1997. "Evidence of public spending crowding-out from a panel of OECD countries," Applied Economics, Taylor & Francis Journals, vol. 29(8), pages 1001-1010.
    4. Nelson, Charles R & Startz, Richard, 1990. "The Distribution of the Instrumental Variables Estimator and Its t-Ratio When the Instrument Is a Poor One," The Journal of Business, University of Chicago Press, vol. 63(1), pages 125-140, January.
    5. Hall, Robert E., 1980. "Labor supply and aggregate fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 7-33, January.
    6. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    7. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
    8. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
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    Cited by:

    1. Anthony Bende-Nabende & Jim Slater, 2003. "Private capital formation: Short- and long-run crowding-in (out) effects in ASEAN, 1971-99," Economics Bulletin, AccessEcon, vol. 3(28), pages 1-16.

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