Does Government Spending Crowd Out Private Consumption and Investment?

Abstract

To counteract the impact of the financial crisis, governments have imple-mented significant fiscal stimulus packages that involve a combination of tax cuts and a boost in social and public infrastructure spending. While, before the turmoil, there was broad consensus that monetary policy should be the primary tool of stabilisation policy, and fiscal policy should play lit-tle role beyond allowing automatic stabilisers to operate, during the crisis almost all major countries adopted discretionary fiscal policy measures. In the debate on the fiscal policy response to the economic downturn, the effectiveness of fiscal policy to support the economy has, there-fore, regained importance and renewed the interest on the topic among researchers