U.S. Government Budget Deficits and the Crowding-Out Effect
Poulsen, Robert L., Jr.
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The major problem studied in this paper is the crowding-out effect. The purpose of this paper is to determine whether the crowding-out effect is occurring in the U.S., or around the world, because of U.S. government budget deficits. If it is, the way fiscal policy is handled in this country will probably need changing. To study the problem, interest rates within and outside the U.S. are examined to see if U.S. budget deficits affect them. The paper also looks at both sides of the issue to get a better understanding of what is happening. Research studied includes both popular press items and journals. This allows conclusions to be more complete for they are based on both public opinion and mathematical models. There is one factor that limits this paper, it is the time period during which the crowding-out effect has been studied. The crowding-out effect has been hypothesized for many years, but the likelihood of its occurrence was not very high until the last decade. Therefore, the amount of research done on the crowding-out effect has been somewhat limited. Unfortunately, there are no clear-cut answers about the crowding-out effect. After researching the issue, the crowding-out effect remains as elusive as ever. The effect needs to be studied further until more definitive answers can be found. In the second part of the paper, other possible effects of deficits are studied. These effects highlight the importance of U.S. deficits as they pertain to both the U.S. and the entire world. Only time and more studies will tell if U.S. government budget deficits are helping or hurting the U.S. and the world in the long-run.