(DP 1988-06) Financing Decisions, Rational Expectations, and the "Crowding Out" Effect: The Case of the Philippines

Abstract

This study is an empirical test of the validity of the traditional "crowding out" effect versus the Ricardian Equivalence Theorem in the case of a developing country, the Philippines. The assumption of rationality of expectations, and a generalized least squares procedure with cross-equation constraints are used. The data are monthly, covering the period January 1981 to December 1986. The results show that financing decisions matter and a significant "crowding out" effect exists and is discernible in the case of short-term Treasury bill rates. Furthermore, it does not arise because of irrationality on the part of the public but perhaps because of certain structural features in developing countries which allow bonds to add to net wealth.