When Does Government Debt Crowd Out Investment?
Article first published online: 20 SEP 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 30, Issue 1, pages 24–45, January/February 2015
How to Cite
2015), When Does Government Debt Crowd Out Investment?, J. Appl. Econ., 30, pages 24–45. DOI: 10.1002/jae.2356and (
- Issue published online: 28 JAN 2015
- Article first published online: 20 SEP 2013
- Manuscript Revised: 31 JUL 2013
- Manuscript Received: 28 JUN 2011
We examine when government debt crowds out investment for the US economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced-form regressions are inconclusive about crowding out. At longer horizons, distortionary financing is important for the negative investment response to debt. Copyright © 2013 John Wiley & Sons, Ltd.