'Crowing out Effect' (1 Viewer)

[EconomicsLegend]

Hey, could anyone help explain the crowding out effect in relation to bonds for Fiscal Policy.
Thanks

 

[nikkiglitzy_25]

Hey, i'm not too sure about this either (so don't quote me on this), but i think it has something to do with how when the govt. borrows from the domestic private sector to fund the budget deficit, and this increased demand for loanable funds puts upward pressure on the interest rate and effectively 'crowds out' the private sector. The private sector (firms, households) finds its cost of borrowing has risen and instead turns to overseas markets for funds (which can worsen the CAD). tbh i'm not sure if any of this is right and answers your qu.

 

[EconomicsLegend]

Thank you so much for that explanation.. cheers

 

[silentk99]

y is the eco legend asking q's lol

 

[BandSixFix]

Hey, i'm not too sure about this either (so don't quote me on this), but i think it has something to do with how when the govt. borrows from the domestic private sector to fund the budget deficit, and this increased demand for loanable funds puts upward pressure on the interest rate and effectively 'crowds out' the private sector. The private sector (firms, households) finds its cost of borrowing has risen and instead turns to overseas markets for funds (which can worsen the CAD). tbh i'm not sure if any of this is right and answers your qu.

This is good.

 

[muntchuriancandidate]

Nikkiglitzy is correct. Put more simply, if the government borrows domestically to fund a budget deficit, they're going to be taking loanable money away from other domestic borrowers. This is especially problematic in a country like Australia which has a really low savings rate because #treatyoself. Just like with any product, smaller supply = higher price, so the price (interest rate) of those loanable funds goes up. Some domestic borrowers will be 'crowded out' of the credit market because of the higher interest rate. Thanks for nothing Scomo.

It's more of an issue if foreign borrowing doesn't happen, but in reality because domestic borrowers can borrow from overseas the crowding out effect isn't as pronounced as it theoretically could be. Though as said above this isn't great for the CAD.