THE DEFICIT COEFFICIENT - A MIXED-SIGNAL

Whether fiscal deficits ''crowd out'' investment is said to turn on a positive and statistically significant deficit coefficient in a reduce d form interest rate equation. This note demonstrates that the public good and public choice perspectives on government spending undermine t his interpretation of the coefficient. That is, if public spending ini tiatives improve or worsen resource allocation, it introduces interest rate/investment variation opposite that underlying the conventional i nterpretation of the coefficient. Absent evidence of the unimportance of the public good/public choice paradigms, the coefficient offers a m ixed signal of crowding out.