Economics at your fingertips  

Default Risk, Interest Differentials and Fiscal Policy: A New Look at Crowding Out

David Bowles, Holley Ulbrich and Myles Wallace
Additional contact information
David Bowles: BellSouth
Myles Wallace: Clemson University

Eastern Economic Journal, 1989, vol. 15, issue 3, 203-212

Abstract: The crowding out debate fails to incorporate the impact of expansionary policy on interest rates for private sector borrowing through changes in perceived default risk. In a modified IS-LM model with default risk dependent on the state of the economy, government borrowing has an indeterminate effect on interest rates for private borrowers; reduced default risk mitigates any crowding out effect. Testing the model with data from 1959-85 verifies a default risk effect for both monetary and fiscal policy. Expansionary policy reduces the spread between Baa corporate bonds and Treasury bonds of equal maturity.

Date: 1989
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Eastern Economic Journal is currently edited by Cynthia A. Bansak, St. Lawrence University and Allan A. Zebedee, Clarkson University

More articles in Eastern Economic Journal from Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Victor Matheson, College of the Holy Cross ().

Page updated 2023-03-09
Handle: RePEc:eej:eeconj:v:15:y:1989:i:3:p:203-212