When Does Government Debt Crowd Out Investment?

Nora Traum, Shu-Chun S. Yang
2010 Social Science Research Network  
We examine when government debt crowds out investment for the U.S. 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
more » ... nships 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.
doi:10.2139/ssrn.1611196 fatcat:32as46z6xfccxkagiglufj455i