Impact of Public Debt, Decit and Debt Financing on Private Investment in a Large Country: Evidence from the United States

Abstract

This paper analyses the direct impact of scal variables on private investment. The current literature ignores one or more scal variables and, in many cases, the foreign nancing of debt. In this paper, an aggregate investment function for an economy in which rms incur adjustment costs in their investment process is developed. The developed model incorporates the direct impact of government expenditure, public debt and investment, decits and foreign-nanced debt on private investment. The model is tested on US data. It is found that public investment does not have any impact on private investment, but government expenditure, decit, debt and foreign-nanced debt crowd out private investment over the long run. However, decit crowds in the private investment over the short run.