Does Government Spending Crowd Out Private Consumption and Investment?: Theory and some empirical evidence
& Ricardo M. Sousa
Published: December 2011
This paper reviews the theoretical and empirical literature on the existence of crowding-out versus crowding-in effects. It also provides some new empirical evidence on the effect of changes in government spending on private consumption and investment by using a panel of 145 countries from 1960 to 2007. We find that government spending crowds out both private consumption and investment. In addition, we show that this result does not depend on the phase of the business cycle, but differs substantially among regions. We also find that the crowding-out effects are larger in the event of expansionary changes.