Crowding-Out Hypothesis Versus Ricardian Equivalence Proposition: Evidence from Literature

Abstract

The size of government expenditure in an economy grows over time. To finance these expenditures, public incomes must grow as well. Given that tax revenues are not sufficient for such spending and levying, new taxes and/or increasing current tax rates are not politically desirable, the only option left is to borrow. The purpose of this paper is to survey the two most important approaches, "crowding-out hypothesis" and "Ricardian Equivalence proposition", in the literature, and evaluate the economic consequences of public borrowing.

Keywords: Crowding-out, crowding-in, Ricardian equivalence, government expenditure, public borrowing

JEL Classification: H5, H6