The crowding out effect is a term that it’s being used more and more on financial newspapers and other reports. But I do not want you to feel left out of the conversation every time someone brings it up – and it does happen quite often lately, no wonder why – so here’s a brief explanation.
Let’s take a random example, the English government. An increase in the English government’s expenditure may have to be financed by borrowing money. This would lead to an increase in interest rates, which would eventually result in higher borrowing costs for the private sector.
Higher borrowing costs for the private sector or else tighter bank lending terms would naturally lead to a reduction in demand. And if such a ‘hypothetical’ scenario was to take place, the government will have ‘crowded out’ the private sector due to its increase in spending.
Not to mention how bad that would be in terms of inflation…
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3 Comments
MoneyEnergy
May 27, 2008Interesting. I haven't heard of that term before. But I have read a bit about central bank manipulation of commodity prices, such as gold. It's possible that certain "crowding out" effects are planned to some extent.
The What Girl
June 17, 2008Yes, they are but when they are not successful they create the "crowding out" effect. Heads up, you can read more about this term in CFA Institute's underlying reading material, which of course provides much more information about its cause and effect.
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March 7, 2009Your writing style is quite a good role model for me - I have recently started my own blog and I am really struggling to write articles!