Crowding Out Effect

Crowding Out Effect

An economic theory explaining an increase in interest rates due to rising government borrowing in the money market.

Notes:

Governments often borrow money (by issuing bonds) to fund additional spending. The problem occurs when government debt 'crowds out' private companies and individuals from the lending market.

Increased government borrowing tends to increase market interest rates. The problem is that the government can always pay the market interest rate, but there comes a point when corporations and individuals can no longer afford to borrow.

See also: Corporate Finance, Economics, Finance