The Reaction of Private Spending and Market Interest Rates to the Changes in Public Spending

Przekota Grzegorz () and Lisowska Agnieszka ()
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Przekota Grzegorz: Koszalin University of Technology, Koszalin, Poland
Lisowska Agnieszka: Koszalin University of Technology, Koszalin, Poland

Foundations of Management, 2016, vol. 8, issue 1, 203-210

Abstract: Expansionary fiscal policy is mired in controversy. Its proponents suggest that during recession, it stimulates investors’ activity and has a stabilizing effect on economic growth. However, its opponents point to the costs associated with the budget deficit and public debt handling. Increased public spending may result in an increase in the interest rates, which may, in turn, hinder private investment and weaken the multiplier effect of public spending. The following study examines how private spending and market interest rates reacted to changes in public spending in Poland. The study has shown that public spending stimulates private spending, which is consistent with the Keynesian model, but it also leads to an increase in market interest rates, which is consistent with the neoclassical model.

Keywords: crowding out; public spending; private spending; interest rates; cointegration (search for similar items in EconPapers)
JEL-codes: E44 H68 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:founma:v:8:y:2016:i:1:p:203-210:n:16

DOI: 10.1515/fman-2016-0016

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