Expulsion or crowding out effect

economic-dictionary

The expulsion or crowding effect out, also known as the crowding-out effect, is a situation in which public debt diverts investment from the private sector.

Investors prefer to deposit and invest their money in public debt than investing it in private debt, because it offers a higher return. This effect is detrimental to the private sector, since it closes a vital source of financing for companies. The opposite effect is the so-called attraction effect or crowding in.

Causes of the expulsion or crowding out effect

Let's say that a state needs to raise funds to meet its obligations.In this case, you will make your products (treasury bills, bonds, bonds) more attractive by offering higher interest rates. Of course, investors will take their money where they are paid the most. In this way, you turn your back on private business. Thus, while it is important for the State to be able to receive capital, unwanted effects, such as the displacement of private companies, must also be considered.

Consequences of crowding out

After deep economic crises, this phenomenon has occurred in many countries. In the aforementioned economic context, this fact can be observed.

Companies have the financing tap closed, the central bank lends money to banks at very low interest rates and they invest it in public debt. At the same time, this public debt serves to pay the interest on previous bonds, rather than to generate progress. In short, an unsustainable situation in the long term if it is done excessively.

In difficult times, an investor feels that his savings are more secure in the hands of the state. It is believed that it is unlikely that you will not meet your obligations. This circumstance must also be taken into account when talking about crowding out.

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