What is crowding out?

The crowding out or displacement effect by its name in Spanish is an economic theory that is based on the effects that certain State interventions have on the economy and markets as a whole. In those countries that have a mixed type economy, the crowding out theory is summarized in that public sector spending involves a cost in investment and the level of private sector consumption. Contrary to the displacement effect we find the crowding in.

Fundamentals of crowding out theory

The economic theory of the expulsion effect is based on a series of economic principles such as the scarcity of resources and the fact that money is a type of fungible good that needs to be consumed in order to make use of it.

This means that in those situations in which the State has an extra need for financing, they are paid for at the expense of the private sector since, according to the economic theory of crowding out or expulsion effect, this financing from the State will decrease by a value equivalent private sector resources.

Consequences of the displacement effect

The state can intervene in various ways, causing in turn various types and consequences of the displacement effect, although all of them affect in some way supply or demand. Causing a reduction in the investment capacity of private companies motivated by public intervention.

Increased interest rates

When the State intervenes by increasing the interest rates As a consequence, this usually causes a crowding out in the volume of private investment, which is reduced due to the increase in the cost of financing.

Issuance of public debt

When the State intervenes by increasing the emission of public debtAs a consequence, an increase in interest rates is obtained, causing a reduction in investment in private companies that are less profitable.

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