Crowding out in Ricardian economies

Andrew B. Abel

Journal of Monetary Economics, 2017, vol. 87, issue C, 52-66

Abstract: The crowding-out coefficient is the ratio of the reduction in privately-issued bonds to the increase in government bonds that are issued to finance a tax cut. If (1) Ricardian Equivalence holds, and (2) households do not borrow risklessly while holding positive gross positions in other riskless assets, the crowding-out coefficient equals the fraction of the aggregate tax cut that accrues to households that borrow. In the conventional case in which all households receive equal tax cuts, the crowding-out coefficient equals the fraction of households that borrow; in the United States, about 75% of households borrow, so the crowding-out coefficient is predicted to be 0.75. Allowing for cross-sectional variation in tax changes increases the crowding-out coefficient to about 0.85.

Keywords: Crowding out; Ricardian Equivalence; Bonds (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:87:y:2017:i:c:p:52-66

DOI: 10.1016/j.jmoneco.2017.03.002

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