When Does Government Debt Crowd Out Investment?

Nora Traum · Shu-Chun Susan Yang

91 citations0/0 files storedJournal of Applied Econometrics

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Fiscal Policies and Political Economy Monetary Policy and Economic Impact Fiscal Policy and Economic Growth

Abstract

We examine when government debt crowds out investment for the US economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced-form regressions are inconclusive about crowding out. At longer horizons, distortionary financing is important for the negative investment response to debt. Copyright © 2013 John Wiley & Sons, Ltd.

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1993Discretion versus policy rules in practice 1975MONOPOLISTIC COMPETITION AND OPTIMUM PRODUCT DIVERSITY 2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 1969A General Equilibrium Approach To Monetary Theory 2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 1991Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies 2007Understanding the Effects of Government Spending on Consumption

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