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A NOTE ON THE CROWDING-OUT OF INVESTMENT BY PUBLIC SPENDING

Published online by Cambridge University Press:  17 March 2010

Olivier Cardi
Olivier Cardi*
Affiliation:
ERMES, Université Panthéon-Assas Paris 2 and Ecole Polytechnique
*
Address correspondence to: Olivier Cardi, Département d'Économie, École Polytechnique, 91128 Palaiseau Cedex, France; e-mail: olivier.cardi@u-paris2.fr.
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Abstract

One of the most prominent and consistent findings of the recent empirical literature on fiscal policy is that investment expenditure is crowded out by public spending in the short run. In this contribution, we address this empirical fact using a dynamic general equilibrium model and show that the introduction of habit-forming behavior plays a major role in accommodating the observed negative relationship between investment and government expenditure. Our numerical experiments point out the role of consumption inertia in determining the reactions of the open economy: as habit persistence gets stronger, fiscal expansion crowds out real consumption by a smaller amount and investment by a larger one, while the current account enters into a greater deficit.

Keywords

InvestmentHabit FormationCurrent AccountFiscal Expansion
Type
Notes
Information
Macroeconomic Dynamics , Volume 14 , Issue 4 , September 2010 , pp. 604 - 615
Copyright
Copyright © Cambridge University Press 2010

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