Crowding out and the rate of return on capital in Japan |
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| Institution: | 1. Department of Economics, Kansas State University, 319 Waters Hall, Manhattan, KS 66506-4001, United States;2. Department of Economics, Kansas State University, 327 Waters Hall, Manhattan, KS 66506-4001, United States;1. Faculty of Economics, Musashi University, 1-26-1, Toyotama-kami, Nerima, Tokyo 176-8534, Japan;2. Graduate School of Strategic Management, Chuo University, 1-13-27, Bunkyo-ku, Kasuga, Tokyo 112-8511, Japan;3. Graduate School of Finance, Accounting and Law, Waseda University, 1-4-1, Nipponbashi, Chuo-ku, Tokyo 103-0027, Japan;4. Faculty of Business and Commerce, Keio University, 2-15-45, Mita, Minato-ku, Tokyo 108-8345, Japan |
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| Abstract: | It is often argued that a crowding out of capital must be accompanied by a rise in the rate of return on capital and in the interest rate. This paper demonstrates that this does not need to be the case by showing that the hypothesis of a crowding out of capital in Japan during the 1990s is consistent with a fall in the rate of return on capital and in the interest rate. In the model economy constructed in the paper, persistent increases in government debt which crowd out capital also induce a decline in the price of existing capital goods. This decline leads to capital losses. When these capital losses are large enough to offset increases in the marginal product of capital stemming from the fall in the stock of capital, the rate of return on capital will fall. Numerical exercises suggest that the crowding out of capital contributed to the decline in the rate of return of capital observed in Japan during the 1990s. |
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