What is the definition of crowding-out effect?

1. Crowding-out effect means that the government issues government bonds to raise funds from the private lending capital market in order to balance the budget deficit, which makes the market interest rate rise and the private investment and expenditure decrease accordingly. This is the crowding-out effect of fiscal deficit caused by public expenditure on private investment and expenditure.

2. The crowding-out effect depends on the response of private savings and investment to market interest rates and the degree to which the central bank adjusts the money supply by buying and selling government bonds in the open market. Monetarist economists believe that if the money supply is not adjusted, the role of Keynesian fiscal policy in promoting and hindering aggregate demand will be limited; Pure fiscal policy will lead to an increase in interest rates, which will affect private investment and expenditure. After World War II, major western countries, especially the United States, pursued Keynesian fiscal policies, that is, under the conditions of prosperity and employment, the government should increase taxes or reduce public expenditure to curb the increase in total demand; In times of depression and unemployment, we should either reduce taxes or increase public expenditure, or both. At the same time of reducing taxes, we should increase public expenditure, thus stimulating the increase of total demand and increasing effective demand, thus generating a fiscal deficit.

3. The crowding-out effect of deficit caused by public expenditure on private investment and expenditure has become one of the focuses of debate between Keynesianism and monetarism. The difference between Keynesianism and monetarism is that Keynesianism thinks that fiscal policy has a direct effect on aggregate demand, while monetarism thinks that fiscal means only indirectly affects aggregate demand through interest rate and money circulation speed, and crowding-out effect is a policy effect produced by pure fiscal means.