Public debt and private investment

a column by Yi Huang, Ugo Panizza and Richard Varghese for VOX: CEPR’s Policy Portal

Establishing the presence of a causal link from public debt to economic growth and investment has proved challenging.

This column uses data for nearly 550,000 firms in 69 countries to show that government debt affects corporate investment by tightening the credit constraints faced by private firms. Higher levels of public debt increase the correlation between investment and cashflow for firms that are more likely to be credit constrained – i.e. unlisted, small, and young firms – but appear to have no effect on the correlation between cash and investment of listed, well-established, and large firms.

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The crowding out effect from the European debt crisis perspective: Eurozone experience

an article by Baki Demirel and İlhan Eroğlu (Gaziosmanpasa University, Tokat, Turkey) and Cumhur Erdem (Abant İzzet Baysal University, Bolu, Turkey) published in International Journal of Sustainable Economy Volume 9 Number 1 (2017)

Abstract

The present study aims to measure the crowding out effect for the countries in the Eurozone that have tried to finance budget deficits through borrowing. We have examined the effects of government debt, government expenditure, interest rate and growth rate on private investments for the 2000-2015 period.

The results show that government debt, government expenditure, interest rates and budget deficits all affect private investment negatively and the impact of economic growth is positive.

The findings of the study support the existence of the crowding out effect in the Eurozone for the period of 2000-2015.

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