The economics of crowding out

Simon Benninga and Uri M. Possen
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Simon Benninga: Hebrew University of Jerusalem, Israel
Uri M. Possen: Cornell University, USA

Finnish Economic Papers, 1991, vol. 4, issue 1, 10-23

Abstract: We consider fiscal policy in a non-monetary, general equilibrium framework with uncertainty, in which the financing of the government budget has no effects. We show that »crowding out» and »crowding in» depend on whether the fiscal policy requires a gestation period or whether its effect is contemporaneous with the taxation by which it is financed. The optimality conditions and the comparative statics of the equilibrium are entirely different for these two cases. In addition to this timing question, the optimality conditions depend on whether the public good has infrastructure effects and/or has intrinsic utility.

Date: 1991
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