Investment effects of departures from governmental present-value budget balance

Erick Elder

Applied Economics, 1999, vol. 31, issue 10, 1239-1247

Abstract: The paper investigates whether departures from government borrowing constraints affect the relationship between fiscal-policy innovations and changes in the investment level. 'Break points', or apparent departures from present-value budget balance, are then identified. Next, the investment-deficit relationship is examined prior to and following identified break points in an effort to detect potential changes in behaviour. The investment-deficit relationship is quantified by examining posterior coverage bounds of impulse response functions. Britain appears to undergo such a break around 1973. Data from this country suggest that significantly more crowding out occurred following the identified breaks: in contrast, data from other comparison countries that do not appear to have experienced breaks indicate stable investment-deficit relationships.

Date: 1999
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DOI: 10.1080/000368499323454

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