Adjusting unsustainable budget deficits and crowding out

We use an intertemporal general equilibrium model to study the crowding out effects of tax cuts. in the economy considered, deficits incurred by cutting taxes are unsustainable in the long run but the necessary budget adjustment can be rapid or slow. the model has an overlapping generations structure and is solved numerically for its steady state as well as the transition path between different steady states. we report two main results. first, crowding out due to a tax cut is barely detectable over a medium run of time, say 10 years, but is substantial in the long run for realistic assumptions about the structural parameters of the model economy. second, slow adjustment of fiscal policy to long run sustainable deficits can aggravate crowding out markedly.