Fiscal Spending and Crowding out Effect: A Comparison between Developed and Developing Countries

This paper evaluates the effect of disaggregated fiscal spending (consumption, capital formation and budget deficit) on private investment in both developed and developing countries using a panel data over the period of 2000-09. The results indicate that the elasticity of private investment with respect to government capital formation expenditure is positive in both groups (crowd in effect), but this complementary effect is greater than in the developed countries. Likewise, the elasticity of private investment with respect to government consumption spending is significantly negative in both groups (crowd out effect), but this substitution effect is larger in developed countries. Furthermore, the effect of budget deficit on private investment in developed countries is negative (crowd out effect), while this effect is positive in developing countries (crowd in effect). However, these effects are marginal in both groups.