Fiscal Policy and Crowding Out in Developing Asia

29 Pages Posted: 22 Oct 2010

See all articles by Seok-Kyun Hur

Seok-Kyun Hur

Korea Development Institute (KDI)

Sushanta Mallick

Queen Mary - University of London; Queen Mary University of London

Donghyun Park

Asian Development Bank - Economic Research

Date Written: September 1, 2010

Abstract

Fiscal stimulus programs have contributed substantially to developing Asia’s faster and stronger than expected recovery from the global financial crisis. This may lead to political pressures for greater use of countercyclical fiscal policy in the postcrisis period. However, the countercyclical effectiveness of fiscal policy depends critically on the extent to which it crowds out private investment and consumption. In the medium term, the use of fiscal policy to promote rebalancing toward domestic demand may require a moderate fiscal expansion. The extent of crowding out will impinge upon the effectiveness of such fiscal expansion in boosting domestic demand. Therefore, crowding out has implications for the effectiveness of fiscal policy as a tool for both short-run macroeconomic stabilization and medium- to long-term structural rebalancing. Overall, our evidence is decidedly mixed, with no clear evidence of either crowding out or crowding in. The evidence fails to provide compelling support for greater use of fiscal policy for countercyclical purposes. In the context of rebalancing, fiscal expansion will not, in and of itself, contribute to a more balanced demand and output structure. That would require using fiscal policy to help remove the structural impediments to private consumption and investment.

Keywords: Fiscal policy, stabilization, rebalancing, crowding out, consumption, investment, Asia

JEL Classification: E62, O40

Suggested Citation

Hur, Seok-Kyun and Mallick, Sushanta and Mallick, Sushanta and Park, Donghyun, Fiscal Policy and Crowding Out in Developing Asia (September 1, 2010). Asian Development Bank Economics Working Paper No. 222, Available at SSRN: https://ssrn.com/abstract=1695286 or http://dx.doi.org/10.2139/ssrn.1695286

Seok-Kyun Hur (Contact Author)

Korea Development Institute (KDI) ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Sushanta Mallick

Queen Mary University of London ( email )

Mile End Rd
London, E1 4NS
United Kingdom
+44 20 7882 7447 (Phone)

HOME PAGE: http://skmallick.busman.qmul.ac.uk/

Queen Mary - University of London ( email )

School of Business and Management
Mile End Road
London, England E1 4NS
United Kingdom
+44 20 7882 7447 (Phone)

HOME PAGE: http://skmallick.busman.qmul.ac.uk/

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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