What Is the Crowding Out Effect?

The crowding-out effect is that the government uses the method of issuing government bonds to raise funds from the private loan market in order to balance the fiscal budget deficit, which causes market interest rates to rise and private investment and expenditure to decline accordingly. This is the crowding effect of fiscal deficits on public investment on private investment and spending. The crowd-out effect depends on the extent to which private savings and investments respond to market interest rates and the extent to which the central bank buys and sells government bonds in the open market to adjust the money supply. Monetary economists believe that if the money supply is not adjusted, Keynesian fiscal policy will have a limited role in promoting and hindering aggregate demand; while pure fiscal policy will lead to rising interest rates and affect private investment and spending . After the Second World War, major Western countries, especially the United States, pursued Keynesian fiscal policies, that is, under conditions of prosperity and employment, governments should increase taxes or reduce public expenditures to curb the increase in aggregate demand; When unemployment occurs, tax revenue is reduced, or public expenditure is increased, or both measures are taken to increase public expenditure while reducing taxation, thereby stimulating an increase in aggregate demand and increasing effective demand. This creates a fiscal deficit. This problem is getting worse in the United States: the fiscal deficit has exceeded $ 2 trillion, and new huge budget deficits are added every year. In this way, the crowd-out effect of the deficit caused by public expenditure on private investment and expenditure has become one of the focal points of the Keynesian and monetarist debate. The differences between Keynesianism and monetarism are: Keynesianism believes that fiscal policy has a direct effect on aggregate demand, while monetarism believes that fiscal means indirectly affects aggregate demand only through the interest rate and the rate of currency circulation, while the crowding out effect is A policy effect produced by purely fiscal instruments. ^[1]

Crowd out effect

Crowding out effect

In the short term, when the economy does not materialize

Overview

There are two explanations for the mechanism of the squeezing effect. One explanation is:

simply put,

At first

although

The concept of the crowd-out effect of funds on the stock market

1. When

FDI's technology crowd-out effect refers to the negative effects caused by event factors such as foreign direct investment replacing domestic investment, creating unfair competition, inhibiting local technological progress and productivity growth, hindering technological proliferation, and stealing advanced technological information from domestic enterprises. Multinational companies' overseas investment is based on maximizing profits as the fundamental goal. With the expansion of multinational companies in host countries, relying on their strong market power, they will exert tremendous pressure on domestic companies and may cause more and more local companies to be squeezed market. Aitken and Harrison in their research on Venezuela found that in the short term, foreign-funded enterprises have reduced the production efficiency of local enterprises by forcing them to reduce their production scale, and market stealing effects have occurred. With the gradual withdrawal of local enterprises from the market, a market structure in which foreign-funded enterprises are in a monopoly position has been formed, and this structure will greatly hinder the technological progress of local enterprises and eventually harm the interests of local consumers. The extreme situation is that after a foreign-funded company gains a monopoly position, it uses imperfect market competition conditions to obtain excess profits and return the profits to its home country.

From the actual situation, there are three types of mechanisms for the crowd-out effect of FDI on domestic enterprises: First, in some industries that have already had more domestic investment, FDI has entered the market by virtue of its brand, technology, and marketing advantages. In the competition, domestic-funded enterprises were gradually squeezed out of the market. Second, in industries where domestic-funded enterprises were underinvested, FDI entered aggressively, quickly occupying the market, and blocked the entry of other domestic investments by virtue of its first-mover market advantage. In addition, there is an empirical possibility that foreign-funded enterprises learn technology from advanced domestic-funded enterprises and enjoy domestic technology spillovers, thereby forming a new relative crowding-out effect.