reversal of the crowding out effect (1 Viewer)

[symo]

how does it work. ive got:
a contractionary fiscal policy may increase medium term growth if it encourages decreased interest rates and increased confidence, it has been confirmed by the imf n oecd
cheers
get it know... surplus/ smaller deficit reduces public sectors demand for credit. therefore decreasing interest rates encouraging private investment + consumption = growth

 

[saves.the.day]

by "reversal of the crowding out effect" I assume you mean crowding in effect?

Well when a government adops an contractionary fiscal policy, by definitnon, a surplus would be generated as government expenditure is exceeded by taxation revenue. They can do 3 things with the surplus:
1. impound
2. pay off national debt (money borrowed from the public through issue of first hand bonds)
3. pay off foreign debt

Paying off national debt is called retiring the debt. When they retire the debt, in increases the supply of funds in the economy, causing the interest rates to fall. This will increase demand as borrowing domestically will increase. It's called crowding in as it attracts investors wishing to borrow.

 

[symo]

so could you say for the crowding in effect, due to:

1 - decreased demand for funds due to surplus, thus decreased rates

2- surplus pays of domestic debt: increases supply thus decreased rates

 

[saves.the.day]

I would go with what you typed in for reason number 2.

surplus pays of domestic debt: increases supply thus decreased rates

I'm trying to work out the logic in reason 1, but can't really see how demand for funds will decrease because of a surplus budget, but I know for sure, crowding in occurs becasue of debt retirement.

 

[monkey187]

I think that a budget surplus means contractional fiscal policy mans reduced AD means less demand for funds

you know fiscal influencing the level of eco growth

 

[Nick]

i think uve got it kinda wrong with the crowding out effect thing..

crowding out occurs when the Govt runs a deficit, which means investors and borrowers must turn to OS to borrow funds..

avoiding the crowding out effect involves the Govt running a budget surplus, which means there is a domestic pool of funds from which people can borrow, and they wont have to turn to OS, so they wont be adding to the foreign debt and income deficit..

i think thats wat it is..

 

[timmii]

saves the day - i'd be careful using the term "crowding in". Strictly, this means that teh govt borrows heavily (drawing down funds available for private investment), but rather than causing private investment to decline, it provides an indication that expaansionary fiscal policy will boost AD and thus encourage firms to invest - since they will be able to benefit from increased incomes.