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Title:Fiscal deficit, capital formation, and crowding out in India: evidence from an asymmetric VAR model PDF Logo
Authors:Chakraborty, Lekha S.
Issue Date:2007
Series/Report no.:Working papers // The Levy Economics Institute 518
Abstract:This paper analyzes the real (direct) and financial crowding out in India between 197071 and 200203. Using an asymmetric vector autoregressive (VAR) model, the paper finds no real crowding out between public and private investment; rather, complementarity is observed between the two. The dynamics of financial crowding out is captured through the dual transmission mechanism via the real rate of interestthat is, whether private capital formation is interest-rate sensitive and, in turn, whether the rise in the real rate of interest is induced by a fiscal deficit. The study found empirical evidence for the former but not the latter, supporting the conclusion that there is no financial crowding out in India. The differential impacts of public infrastructure and noninfrastruture innovations on the private corporate sector are carried out separately to analyze the nonhomogeneity aspects of public investment. The results of the Impulse Response Function reinforced that no other macrovariables, including cost and quantity of credit and the output gap, have been as significant as public investmentin particular, public infrastructure investmentin determining private corporate investment in the medium and long terms, which has crucial policy implications.
Subjects:Fiscal Deficit
Crowding Out
Asymmetric Vector Autoregressive Model
JEL:E62
C32
H6
Document Type:Working Paper
Appears in Collections:Working Papers, Levy Economics Institute of Bard College

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