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Crowding-out and Crowding-in Effects of Government Bonds Market on Private Sector Investment (Japanese Case Study)

Discussion Papers

No.074

by Dr. Emad M.A. Abdullatif Alani
October 2006

ABSTRACT

This paper reviews the relationship between public sector investment and private sector investment through government expenditures financed by government bonds in the Japanese economy. This study hypothesizes that deficit financing by bond issues does not crowd out private sector investment, and this finance method may crowd in. Thus the government increases bond issues and sells them in the domestic and international financial markets. This method does not affect interest rates because they are insensitive to government expenditures and they depend on interest rates levels in the international financial market more than in the domestic financial market because of globalization and integration among financial markets.

Keywords: government debt, budget deficit, government bonds, crowding out/crowding in.
JEL classification: E43, E44, E62.

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