IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Do Government Deficits Crowd Out Consumer And Investment Spending?

Listed author(s):
  • John J. Heim


    (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)

This paper econometrically tests whether deficits financed by government borrowing “crowd out” business and consumer spending reductions by reducing credit availability. To test the hypothesis, the government deficit variables are added to consumption and investment models to see if they increase explained variance, negatively impact consumption and investment spending, and are statistically significant. U.S. data for 1960 - 2000 is tested. A demand-driven econometric model, patterned after the work of Klein and Fair and containing eight behavioral equations is used to estimate crowd out effects. Demand models seemed appropriate because they, “provide the foundation of much of our current understanding of economic fluctuations “(Mankiw (2007), because demand fluctuations appear to have caused the recent economic crisis (Romer 2010), and because the fiscal policy prescriptions of demand models clearly lose some or all of their effectiveness if crowd out simultaneously reduces consumption and investment spending by reducing private credit. The findings indicate government deficits financed by borrowing systematically crowd out private consumption and investment spending. The findings also indicate that increases the savings components of M2 can offset part of this crowd out effect. Finally, consumption and investment functions with crowd out explanatory variables predict generally Keynesian “IS” curve coefficients model more accurately than models without them. The sign of the tax variable in actual econometric tests of IS curve was positive, contrary to predictions from no-crowd out Keynesian models The sign of the tax variable in the IS curve could only be accurately predicted from econometric estimates of consumption and investment equations containing crowd out. Findings for the government spending variable also showed crowd out markedly reduced its stimulus effect, in some model completely offsetting it.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 1005.

in new window

Date of creation: Oct 2010
Handle: RePEc:rpi:rpiwpe:1005
Contact details of provider: Web page:

More information through EDIRC

References listed on IDEAS
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.:

in new window

  1. John J. Heim, 2008. "The Consumption Function," Rensselaer Working Papers in Economics 0805, Rensselaer Polytechnic Institute, Department of Economics.
  2. John J. Heim, 2009. "Demand For Durable Goods, Nondurable Goods And Services," Rensselaer Working Papers in Economics 0906, Rensselaer Polytechnic Institute, Department of Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:rpi:rpiwpe:1005. 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: (Shawn Kantor)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.