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Is Crowd Out A Problem In Recessions?

  • John J. Heim

    ()

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

The crowd out effects of the government deficit is tested by adding it to consumption and investment models which control extensively for other factors. Effects are calculated for recession and non-recession periods, and compared to models with average crowd out, and models without crowd out. Test results indicate 1) deficits crowd out private consumption and investment, are statistically significant, and add substantially to explained variance. They also predict “IS” curve coefficients better than no crowd out models. Crowd out was found to have roughly equal effects in recessions and non-recession periods. Government spending deficits were found to result in complete crowd out, tax cut deficits resulted in more than complete crowd out. Both findings consistent with crowd out theory. Increases in M2, especially it’s saving (Non-M1) components, in the three years prior to a deficit, were found to offset the crowd out effects of government spending deficits, but not the effects of tax cut deficits. M1 increases were not found effective in eliminating crowd out effects. Foreign borrowing can be used to supplement domestic saving, reducing the possibility of crowd out when deficits occur. This paper uses a one variable definition of the deficit (T-G). This implies marginal effects of spending and tax deficits are the same. In working Paper 1104 of this series, these two kinds of deficits are tested separately to determine if they have separate effects.

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File URL: http://www.economics.rpi.edu/workingpapers/rpi1103.pdf
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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 1103.

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Date of creation: Jun 2011
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Handle: RePEc:rpi:rpiwpe:1103
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  1. John J. Heim, 2010. "Do Government Deficits Crowd Out Consumer And Investment Spending?," Rensselaer Working Papers in Economics 1005, Rensselaer Polytechnic Institute, Department of Economics.
  2. Davide Furceri & Ricardo M. Sousa, 2009. "The Impact of Government Spending on the Private Sector: Crowding-out versus Crowding-in Effects"," NIPE Working Papers 6/2009, NIPE - Universidade do Minho.
  3. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  4. John J. Heim, 2008. "The Consumption Function," Rensselaer Working Papers in Economics 0805, Rensselaer Polytechnic Institute, Department of Economics.
  5. 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.
  6. John J. Heim, 2009. "Demand For Durable Goods, Nondurable Goods And Services," Rensselaer Working Papers in Economics 0906, Rensselaer Polytechnic Institute, Department of Economics.
  7. John J. Heim, 2010. "The Declining Exchange Rate: Impact On The U.S. Economy 2000-2009," Rensselaer Working Papers in Economics 1004, Rensselaer Polytechnic Institute, Department of Economics.
  8. William G. Gale & Peter R. Orszag, 2004. "Budget Deficits, National Saving, and Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 101-210.
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