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A decrease in private sector borrowing and spending caused by increased government borrowing is crowding out.

What is crowding out?

  • Crowding out is a phenomenon in economics that occurs when increased government participation in a sector of the market economy has a significant impact on the rest of the market, either on the supply or demand side of the market.
  • One type that is commonly discussed is when expansionary fiscal policy reduces private-sector investment spending.
  • Government spending is "crowding out" investment because it requires more loanable money, raising interest rates, and limiting investment spending.
  • This fundamental study has been expanded to include numerous channels, which may result in little or no change in total output.

Therefore, a decrease in private sector borrowing and spending caused by increased government borrowing is crowding out.

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