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When Does Government Debt Crowd Out Investment?

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  • Nora Traum

    () (North Carolina State University)

  • Shu-Chun Yang

    () (Congressional Budget Office)

Abstract

We investigate the relationship between inequality and education funding in a model of probabilistic voting over public education spending where the private option is available. A change in inequality can have opposite effects at different income levels: higher inequality decreases public spending per student and increases enrollment in public schools in poor economies, while the opposite holds in the rich ones. A change in the tax base can also have non-monotonic effects. We also study the implications of different voting participation across income groups. The predictions of the model are supported by U.S. school district-level data.

Suggested Citation

  • Nora Traum & Shu-Chun Yang, 2010. "When Does Government Debt Crowd Out Investment?," CAEPR Working Papers 2010-006, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2010006
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    Cited by:

    1. Edward Gamber & John Seliski, 2019. "The Effect of Government Debt on Interest Rates: Working Paper 2019-01," Working Papers 55018, Congressional Budget Office.
    2. 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.
    3. 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.
    4. 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.
    5. Liaqat, Zara, 2019. "Does government debt crowd out capital formation? A dynamic approach using panel VAR," Economics Letters, Elsevier, vol. 178(C), pages 86-90.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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, Fundação Getulio Vargas (Brazil).
    11. Hur, Joonyoung & Lee, Kang Koo, 2017. "Fiscal financing and the efficacy of fiscal policy in Korea: An empirical assessment with comparison to the U.S. evidence," Economic Modelling, Elsevier, vol. 64(C), pages 473-486.
    12. 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.
    13. Dioikitopoulos, Evangelos V., 2018. "Dynamic adjustment of fiscal policy under a debt crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 260-276.

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