Sluggish Recovery from the Financial Crisis: Crowding-out Effect and Contagion

Abstract

The stimulus plans by the US Government after the financial crisis in 2008 may decrease private investment by means of a crowding-out effect. The US Federal Reserve utilized quantitative easing policies to maintain the interest rate as low as possible to minimize crowding-out. The 2008 financial crisis also affects other economies through contagion effects. This paper investigates the existence of the crowding-out effect and contagion effect after the crisis using Temin and Voth's models. The empirical results from vector autoregession show that there is a crowding-out effect in the US economy as well as a contagion effect of the crisis on the Korean and Japanese economies.

Key Words:

• Crowding-out effect
• contagion effect
• financial crisis
• Granger-causality test

Jel Classification:

• G01
• G18

Acknowledgements

We are grateful to the anonymous referees for their helpful comments. This paper is supported by Kyungsung University Research Grants in 2014.

Notes

1. Test results of Jarque-Bera show the normality of the distribution. This measures the difference between skewness and krutosis. Results of the data description show that the data do not have values of the normally distributed time series. Skewness measures the degree of the asymmetry of the time series centred on average. Skewness of symmetric distribution such as normal distribution is zero. Positive skewness means that the distribution has a long tail towards right hand side. Negative skewness means the distribution has a long tail to the left hand side. Our test results show that all the results of the distributions have a positive sign, meaning that the distributions have a long tail to the right hand side. Kurtosis shows the degree of peakedness or flatness of the time series data. Kurtosis of normal distribution is three. If kurtosis is greater than three, it means that the distribution is leptoturtic compared to the normal distribution. If kurtosis is smaller than three, we interpret that the distribution is platykurtic compared to the normal distribution. In our data, kurtosis of federal debt and FFR is greater than three, meaning that the distribution is leptokurtic compared to the normal distribution. Kurtosis for GDP and private investment is less than three, which means that the distribution is platykurtic compared to the normal distribution.