Crowding Out in Ricardian Economies

Andrew Abel

No 21550, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The crowding-out coefficient is the ratio of the reduction in privately-issued bonds to the increase in government bonds that are issued to finance a tax cut. If (1) Ricardian equivalence holds, and (2) households do not simultaneously borrow risklessly and have positive gross positions in other riskless assets, the crowding-out coefficient equals the fraction of the aggregate tax cut that accrues to households that borrow. In the conventional case in which all households receive equal tax cuts, the crowding-out coefficient equals the fraction of households that borrow. In the United States, about 75% of households borrow, so the crowding-out coefficient is predicted to be 0.75, which differs from econometric estimates that are around 0.5. I explore extensions of the model, such as a departure from Ricardian Equivalence or the introduction of cross-sectional variation in taxes, that might account for this difference.

JEL-codes: E62 G11 H6 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Note: CF EFG ME PE
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Published as Andrew B. Abel, 2017. "Crowding out in Ricardian economies," Journal of Monetary Economics, vol 87, pages 52-66.

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