Sluggish Recovery from the Financial Crisis: Crowding-out Effect and Contagion

Yeon Joon Kim and Joo Young Lee

Global Economic Review, 2014, vol. 43, issue 4, 408-428

Abstract: The stimulus plans by the US Government after the financial crisis in 2008 may decrease private investment by means of a crowding-out effect. The US Federal Reserve utilized quantitative easing policies to maintain the interest rate as low as possible to minimize crowding-out. The 2008 financial crisis also affects other economies through contagion effects. This paper investigates the existence of the crowding-out effect and contagion effect after the crisis using Temin and Voth's models. The empirical results from vector autoregession show that there is a crowding-out effect in the US economy as well as a contagion effect of the crisis on the Korean and Japanese economies.

Date: 2014
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DOI: 10.1080/1226508X.2014.982320

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