Portfolio crowding out and inflation

Although the relationship between inflation and financial investment decisions has long been studied, the literature has failed to recognise its importance for the crowding out issue, i.e. for whether increases in the stock of government debt reduce the equilibrium price of capital. This paper shows that when investors are concerned with real, as opposed to nominal, returns on their portfolios the conclusion of portfolio crowding out may be overturned, other things being equal, by changes in the expected rate of inflation.