Crowding out in Ricardian economies |
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Affiliation: | 1. CER-ETH – Center of Economic Research at ETH Zurich and CEPR, 8092 Zurich, Switzerland;2. Department of Banking and Finance, University of Zürich, UNIGE, SFI and Toulouse School of Economics, Switzerland;1. Department of Economics, Mihaylo College of Business and Economics, California State University Fullerton, Fullerton, CA 92834, United States;2. Department of Economics, University of Western Ontario, London, ON N6A 5C2, Canada |
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Abstract: | The crowding-out coefficient is the ratio of the reduction in privately-issued bonds to the increase in government bonds that are issued to finance a tax cut. If (1) Ricardian Equivalence holds, and (2) households do not borrow risklessly while holding positive gross positions in other riskless assets, the crowding-out coefficient equals the fraction of the aggregate tax cut that accrues to households that borrow. In the conventional case in which all households receive equal tax cuts, the crowding-out coefficient equals the fraction of households that borrow; in the United States, about 75% of households borrow, so the crowding-out coefficient is predicted to be 0.75. Allowing for cross-sectional variation in tax changes increases the crowding-out coefficient to about 0.85. |
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