Fiscal Deficit, Capital Formation, and Crowding Out : Evidence from India
Theoretical literature identifies two variants of crowding out in an economyâ€“real and financial. The real (direct) crowding out occurs when the increase in public investment displaces private capital formation broadly on a dollar-for-dollar basis, irrespective of the mode of financing the fiscal deficit. The financial crowding out is the phenomenon of partial loss of private capital formation, due to the increase in the interest rates emanating from the pre-emption of real and financial resources by the government through bond-financing of fiscal deficit. The paper analysed the real and financial crowding out in India during 1970-71 to 2002-03. Using asymmetric vector autoregressive model, the paper finds no real crowding out between public (in particular, infrastructure) and private investment; rather complementarity is observed between the two. The dynamics of financial crowding out is captured through the dual transmission mechanism via real rate of interest; that is, whether private capital formation is interest rate sensitive and in turn whether the rise in real rate of interest is induced by fiscal deficit. The study found empirical evidence for the former, but not the latter, reinforcing no financial crowding out in India. [NIPFP WP 43]
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Feltenstein, 1986. "Financial Crowding out: Theory with an Application to Australia (Ã‰viction en matiÃ¨re de financement: thÃ©orie et application au cas de l'Australie) (El desplazamiento financiero: ExposiciÃ³n teÃ³ric," IMF Staff Papers, Palgrave Macmillan, vol. 33(1), pages 60-89, March.
- Robert S. Pindyck & Andres Solimano, 1993.
"Economic Instability and Aggregate Investment,"
NBER Working Papers
4380, National Bureau of Economic Research, Inc.
- Pindyck, Robert S. & Solimano, Andres, 1993. "Economic instability and aggregate investment," Policy Research Working Paper Series 1148, The World Bank.
- Pindyck, Robert S. & Solimano, Andrés., 1993. "Economic instability and aggregate investment," Working papers 3552-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- repec:kap:iaecre:v:4:y:1998:i:4:p:374-383 is not listed on IDEAS
- Caines, P. E. & Keng, C. W. & Sethi, S. P., 1981. "Causality analysis and multivariate Autoregressive modelling with an application to supermarket sales analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 3(1), pages 267-298, November.
- 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..
- Hirotugu Akaike, 1969. "Fitting autoregressive models for prediction," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 21(1), pages 243-247, December.
- Makin, John H, 1983. "Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 374-84, August.
- Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
- Willem H. Buiter, 1999.
"The Fallacy of the Fiscal Theory of the Price Level,"
NBER Working Papers
7302, National Bureau of Economic Research, Inc.
- W.H. Buiter, 2000. "The Fallacy of the Fiscal Theory of the Price Level," CEP Discussion Papers dp0447, Centre for Economic Performance, LSE.
- Buiter, Willem H., 1999. "The Fallacy of the Fiscal Theory of the Price Level," CEPR Discussion Papers 2205, C.E.P.R. Discussion Papers.
- Willem H. Buiter, 1990. "Principles of Budgetary and Financial Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524139.
- Khan, Mohsin S. & Reinhart, Carmen M., 1990.
"Private investment and economic growth in developing countries,"
Elsevier, vol. 18(1), pages 19-27, January.
- Reinhart, Carmen & Khan, Mohsin, 1989. "Private investment and economic growth in developing countries," MPRA Paper 13655, University Library of Munich, Germany.
- Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
- Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
- Frederic S. Mishkin, 1998.
"Strategies for Controlling Inflation,"
NBER Working Papers
6122, National Bureau of Economic Research, Inc.
- Keating, John W., 2000. "Macroeconomic Modeling with Asymmetric Vector Autoregressions," Journal of Macroeconomics, Elsevier, vol. 22(1), pages 1-28, January.
- Otto, Glenn & Voss, Graham M, 1994. "Public Capital and Private Sector Productivity," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 121-32, June.
- Shafik, Nemat & Shafik, Nemat, 1992. "Modeling private investment in Egypt," Journal of Development Economics, Elsevier, vol. 39(2), pages 263-277, October.
- Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
- Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-75, November.
- Lazaros E. Molho, 1986. "Interest Rates, Saving, and Investment in Developing Countries: A Re-Examination of the McKinnon-Shaw Hypotheses (Taux d'intÃ©rÃªt, Ã©pargne et investissement dans les pays en dÃ©veloppement: rÃ©exame," IMF Staff Papers, Palgrave Macmillan, vol. 33(1), pages 90-116, March.
- V. Sundararajan & Subhash Thakur, 1980. "Public Investment, Crowding out, and Growth: A Dynamic Model Applied to India and Korea (Investissement public, "effet de refoulement" et croissance: un modÃ¨le dynamique appliquÃ© Ã l'Inde ," IMF Staff Papers, Palgrave Macmillan, vol. 27(4), pages 814-855, December.
- Otto, Glenn & Voss, Graham, 1996. "Public Capital and Private Production in Australia," MPRA Paper 52110, University Library of Munich, Germany.
- Cebula, Richard J., 1990. "Government Borrowing and Interest Rates in the United States: An Empirical Ana¬lysis Using the IS-LM Framework," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 43(2-3), pages 159-164.
- Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
- Pradhan, B. K. & Ratha, D. K. & Sarma, Atul, 1990. "Complementarity between public and private investment in India," Journal of Development Economics, Elsevier, vol. 33(1), pages 101-116, July.
- Cebula, Richard J, 1978. "An Empirical Analysis of the "Crowding Out" Effect of Fiscal Policy in the United States and Canada," Kyklos, Wiley Blackwell, vol. 31(3), pages 424-36.
- Ahmad, Mushtaq, 1994. "The Effects of Government Budget Deficits on the Interest Rates: A Case Study of a Small Open Economy," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 47(1), pages 1-6.
- Richard Cebula, 1998. "Budget deficits and long-term interest rates: 1973–91," International Advances in Economic Research, International Atlantic Economic Society, vol. 4(4), pages 374-383, November.
- Grier, Kevin B, 1986. " A Note on Unanticipated Money Growth and Interest Rate Surprises: Mishkin and Makin Revisited," Journal of Finance, American Finance Association, vol. 41(4), pages 981-85, September.
- Gupta, Kanhaya L & Moazzami, Bakhtiar, 1991. "Dynamic Specification and the Long-Run Effect of Budget Deficits on Interest Rates," Public Finance = Finances publiques, , vol. 46(2), pages 208-21.
When requesting a correction, please mention this item's handle: RePEc:ess:wpaper:id:837. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Padma Prakash)
If references are entirely missing, you can add them using this form.