An Intertemporal General Equilibrium Analysis of Financial Crowding Out : A Policy Model and an Application to Australia

This paper constructs a two-period, perfect foresight general equilibrium model that analyzes crowding out. Private investment is debt financed, while government deficits are financed by money and debt. The existence of equilibrium is demonstrated and the model is applied to Australia for 1981-1982, the last years for which Australia had a fixed exchange rate. A benchmark solution is derived and two counterfactual simulations are carried out. Small increases in real government spending are found not to lead to crowding out, while an increase in the debt financed portion of the government's budget deficit does lead to crowding out