When Does Government Debt Crowd Out Investment?

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 termdepends on policy shocks triggering...

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Bibliographic Details
Published inJournal of applied econometrics (Chichester, England) Vol. 30; no. 1; pp. 24 - 45
Main Authors Traum, Nora, Yang, Shu-Chun S.
Format Journal Article
LanguageEnglish
Published Chichester Blackwell Publishing Ltd 01.01.2015
Wiley (Variant)
Wiley Periodicals Inc
Subjects
Capital tax
Deficit financing
Economic theory
Federal Reserve monetary policy
Fiscal policy
Investment
Investment policy
Keynesian theory
Keynesianism
Public debt
Studies
Tax rates
U.S.A
United States > US
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Summary: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 termdepends 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.
Bibliography:ark:/67375/WNG-JH6BSK5J-W
ArticleID:JAE2356
istex:28FAF3EC3463AE5F5DA7651755DA4B9C22D97C41
ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
content type line 23
ISSN:0883-7252
1099-1255
DOI:10.1002/jae.2356