ABSTRACT
We saw in the previous chapter that some crowding-out effects did exist in a number of countries. Given this, the question arises as to the possible mechanism(s) which might lead to this result. The most common route suggested is via increases in interest rates caused by high and persistent budget deficits. Here two alternate schools of thought exist. The traditional, or the Keynesian, one states that budget deficits, by affecting aggregate demand, do exercise a positive effect on interest rates. But the Ricardian view, as explained in Chapter 6, postulates no such effect. Unfortunately, not only is there ambiguity in the theoretical literature, the empirical findings are inconclusive also. The situation for the developing countries is even more complicated because all of the evidence on this issue is confined to the developed countries.1 Consequently, the aim of this chapter is to make a beginning in filling this gap.
