Crowding Out Or Crowding In? The Economic Consequences of Financing Government Deficits

Benjamin M. Friedman

No 284, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The prevailing view of the economic consequences of financing government deficits, as reflected in the recent economics literature and in recent public policy debates, reflects serious misunderstandings. Debt-financed deficits need not "crowd out" any private investment, and may even "crowd in" some. Using a model including three assets - money, government bonds, and real capital - the analysis in this paper shows that the direction of the portfolio effect of bond issuing on private investment depends on the relative substitutabilities among these three assets in the public's aggregate portfolio. Since the all-important substitutabilities that make the difference between "crowding out" and "crowding in" are determined in part by the government's choice of debt instrument for financing the deficit, this analysis points to the potential importance of a policy tool that public policy discussion has largely neglected for over a decade - debt management policy. When monetary policy is non-accommodative, within limits debt management policy can take its place in augmenting the potency of fiscal policy, or in improving the trade-off between short-run stimulation and investment for long-run growth.

Date: 1978-10
Note: EFG ME
References: Add references at CitEc
Citations: View citations in EconPapers (114)

Published as Friedman, Benjamin M. "Crowding Out or Crowding In? The Economic Consequences of Financing Government Deficits." Brookings Papers on Economic Activity , Vol. 3, (1978), pp. 593-654.

Downloads: (external link)
http://www.nber.org/papers/w0284.pdf (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: https://EconPapers.repec.org/RePEc:nbr:nberwo:0284

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0284

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().