Crowding-out, home bias and financial stability in the aftermath of the sovereign debt crisis

Abstract

Crowding-out is the phenomenon in which government spending in one sector of the economy crowds out the private sector. This paper calibrates a DSGE model for Romania and then estimates a VAR model for Romania, the Czech Republic, Poland, and Hungary. From this broad perspective, it can be ascertained that risk stemming from unsustainable debt levels is attributed to the entire macro-financial framework and not just to the fiscal sector. The analysis focuses on the period around the sovereign debt crisis, when the crowding-out effect held a pivotal position in the dynamic interplay between public sector borrowing and private investment.

Keywords

• sovereign debt
• investment
• sovereign-bank nexus
• financial crisis
• macro-financial linkages