In well controlled statistical tests, crowd out was found related to government deficits financed by borrowing. Roughly equal effects were found for both recession and non-recession periods. Tax cut deficits were found were found more detrimental than spending deficits Private borrowing was found to systematically decline with the growth of government deficits, and explained most variation in consumer and investment spending also related to deficits. Crowd out may be avoided if foreign borrowing increases loanable funds available, or if M2 money increases prior to the deficit. This study provides first time empirical evidence, using standard demand driven stimulus models, that crowd out occurs in recessions and non-recession periods in response to deficits, fully offsetting stimulus effects. Results are robust to differences in time period tested. They offer a plausible explanation for the lackluster results of recent U.S. government stimulus programs in offsetting the 2008 recession.
John J. Heim. "Can Crowd Out Hamper Stimulus Programs in Recessions?." Proceedings of the New York State Economics Association. vol. 4, September 2011, p. 71-79
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