Pierluigi Balduzzi, Emanuele Brancati, Fabio Schiantarelli, 09 November 2018

The Italian government has decided to pursue an expansionary fiscal policy, with increased welfare spending as its focus. This column uses evidence from the 2010-2012 sovereign debt crisis to explore the potential negative effects of this policy on private investment. It finds that an increase in a bank’s credit default swap spreads leads to lower investment and employment for younger and smaller firms and in the aggregate. These findings suggest the planned fiscal expansion could substantially crowd out private investment.

Yi Huang, Marco Pagano, Ugo Panizza, 03 November 2016

High levels of public debt are correlated with lower economic growth across countries, but questions remain about whether this relationship is causal. Using Chinese data, this column explores whether increasing public debt crowds out private investment. City-level investment ratios are found to be negatively correlated with local government debt for private manufacturing firms, but not for state-owned or foreign-owned manufacturers. This suggests that as well as the short-term benefits of fiscal stimulus, there might also be negative longer-term effects, such as the crowding out of more efficient firms. 

Aqib Aslam, Samya Beidas-Strom, Daniel Leigh, Seok Gil Park, Hui Tong, 18 April 2015

Business investment in advanced economies contracted sharply during the global crisis and has recovered little since. This column argues that the main factor holding back investment is overall economomic weakness. In some countries other contributing factors include financial constraints and policy uncertainty. Fixing the investment dearth will require fixing the general weakness in economic activity.

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