Do Tax Cut And Spending Deficits Have Different Crowd Out Effects?
The crowd out effects of government deficits are tested by adding deficit variables to consumption and investment models which extensively control for other factors. Separate variables are added for deficits resulting from tax cuts and spending increases. Effects are calculated for recession and non-recession periods, and compared to models with average crowd out effects for the whole business cycle, and models without crowd out. Test results indicate 1) deficits crowd out private consumption and investment, are statistically significant, and explain substantial variance. They predict “IS” curve coefficients better than no crowd out models. In both recessions and non-recessions, government spending deficits were associated with complete crowd out, leaving no observable net stimulus effect. Tax cut deficits resulted in more than complete crowd out, resulting in net negative economic effects. Both findings are consistent with crowd out theory. Crowd out was found to have roughly equal effects in recessions and non-recession periods. Results are corroborated by independent testing of borrowing data; total declines in private spending were about equal to total declines in borrowing associated with deficits. Financing deficits by monetary expansion may avoid some crowd out problems, but only if the expansion is in the savings components of M2, and occurs in years immediately before the deficit is incurred, limiting its practicality. Foreign borrowing, to supplement domestic savings, can reduce the potential for crowd out.
|Date of creation:||Jun 2011|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.economics.rpi.edu/|
More information through EDIRC
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 Mountford & Harald Uhlig, 2005.
"What are the Effects of Fiscal Policy Shocks?,"
SFB 649 Discussion Papers
SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Mountford, A.W. & Uhlig, H.F.H.V.S., 2002. "What are the Effects of Fiscal Policy Shocks?," Discussion Paper 2002-31, Tilburg University, Center for Economic Research.
- Andrew Mountford & Harald Uhlig, 2008. "What are the Effects of Fiscal Policy Shocks?," NBER Working Papers 14551, National Bureau of Economic Research, Inc.
- Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
- John J. Heim, 2009. "Demand For Durable Goods, Nondurable Goods And Services," Rensselaer Working Papers in Economics 0906, Rensselaer Polytechnic Institute, Department of Economics.
- 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.
- John J. Heim, 2008. "The Consumption Function," Rensselaer Working Papers in Economics 0805, Rensselaer Polytechnic Institute, Department of Economics.
- 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.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:rpi:rpiwpe:1104. 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 references are entirely missing, you can add them using this form.