Default Risk, Interest Differentials and Fiscal Policy: A New Look at Crowding Out
The crowding out debate fails to incorporate the impact of expansionary policy on interest rates for private sector borrowing through changes in perceived default risk. In a modified IS-LM model with default risk dependent on the state of the economy, government borrowing has an indeterminate effect on interest rates for private borrowers; reduced default risk mitigates any crowding out effect. Testing the model with data from 1959-85 verifies a default risk effect for both monetary and fiscal policy. Expansionary policy reduces the spread between Baa corporate bonds and Treasury bonds of equal maturity.
Year of publication: |
1989
|
---|---|
Authors: | Bowles, David ; Ulbrich, Holley ; Wallace, Myles |
Published in: |
Eastern Economic Journal. - Eastern Economic Association - EEA, ISSN 0094-5056. - Vol. 15.1989, 3, p. 203-212
|
Publisher: |
Eastern Economic Association - EEA |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Default risk, interest differentials and fiscal policy : a new look at crowding out
Bowles, David, (1989)
-
Default risk and the effects of fiscal policy on interest rates : 1929 - 1945
Bowles, David, (1988)
-
The Crowding out Debate: It's over When It's over and It Isn't over Yet
Placone, Dennis, (1985)
- More ...