Does Government Debt Crowd Out Investment? A Bayesian DSGE Approach: Working Paper 2010-02

Working Paper
April 15, 2010

Nora Traum and Shu-Chun Susan Yang

We estimate the crowding-out effects of government debt for the U.S. economy using a New Keynesian model with a detailed fiscal specification. The estimation accounts for the interaction between monetary and fiscal policies. Whether private investment is crowded in or out in the short term depends on the fiscal or monetary shock that triggers debt expansion. Contrary to the conventional view of crowding out, no systematic relationship among debt, the real interest rate, and invest ment exists. At longer horizons, distortionary financing is important for the negative investment response to a debt expansion.