ABSTRACT
Quite apart from the effects of budget deficits on the growth of money supply and inflation, there are two other contentious aspects, although these are related to the direct effects of deficits on inflation discussed in the last chapter. One is the possible crowdingout effect of government expenditures on private expenditures. To the extent that such crowding out occurs, the effectiveness of fiscal policy is reduced correspondingly. The other aspect deals with the neutrality of the mode of financing such excess expenditures, i.e. budget deficits. The issue here is whether the Ricardian equivalence proposition as restated by Barro (1974) holds. This proposition states that it is irrelevant whether a given budget deficit is financed by tax increases or by debt issue. But the outcome, as discussed below, is based on a number of assumptions. A priori, it is neither possible to decide whether crowding out occurs, and even if it does to what extent, nor whether the Ricardian equivalence proposition holds. The only way to deal with these issues for any given country is via empirical evidence. Consequently, the aim of this chapter is to provide estimates on both aspects for each of the ten countries. Since the policy implications of both crowding out effects and the Ricardian equivalence proposition are serious, the evidence presented in this chapter should allow us to discuss such implications in a concrete way.
