Dynamic implications of fiscal policy: Crowding-out or crowding-in?

The purpose of this paper is to analyze the short run and long run effects of fiscal policy. The classical-Harrodian model developed in Moudud (2000, 1999), which is an extension of Shaikh (1995, 1992, 1991), provides a demonstration of dynamic fiscal policy context. It asserts that the there is a crowding in of output growth in the short run. In the long run, however, the impact of government spending is subject to change under some circumstances of capital utilization, normal profit rate and social savings rate. Blinder and Solow (1973), using IS-LM model, reveal that bond-financed fiscal expansion does not engender a complete crowding out. Friedman (1978, 1985) notices the possibility of crowding-in. Crowding-out or crowding-in debate can be extended to other economists. Blanchard and Perotti (1999) and Easterly and Rebelo (1993) reach crowding-in results. Bairam and Ward (1993) find crowding-out of private investment. Barro (1989, 1999) and Kormendi and Meguire (1985) obtain either a negative or no effect of government spending on the growth, whereas the works of Argimon et al. (1997), Devarajan et al. (1996) and Ahmed and Miller (2000) have mixed results. This study runs VECM models and impulse response analysis to juxtapose the crowding in/out effects of fiscal policy. Investigating the short run and long-run implications of fiscal policy for the Turkish economy, this paper concludes that government investments crowd out, whereas its current expenditures crowd in the private investment.