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Kuehlwein, Michael
Samalapa, Sansern
Year of Publication: 
Series/Report no.: 
Claremont Colleges Working Papers in Economics 1999-34
Some theory suggests that budget deficits and greater public spending will raise real interest rates and crowd-out private investment; other theory suggests there is no effect. We attempt to test this in the Thai economy between the years 1978 and 1994. We find that budget deficits did appear to raise real interest rates during our sample period. Our estimates also suggest that, holding the deficit constant, Thai government current and construction expenditure did not raise real interest rates and that Thai government equipment expenditure lowered them. We try to explain the last result with a framework similar to Barro's (1981) but expanded to include foreign trade and borrowing. Foreign borrowing alleviates the pressure on real interest rates to rise, and, under certain conditions, allows them to fall. We find support for this hypothesis from regression results that suggest that, during our sample period, Thai government equipment expenditure was heavily financed from abroad. The results imply that public investment programs in developing countries that do not boost budget deficits and obtain some foreign financing may not crowd-out private investment and could be a promising means of promoting capital formation.
Document Type: 
Working Paper

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