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Crowding In or Crowding Out? A Classical-Harrodian Perspective

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  • Jamee K. Moudud

    (Jerome Levy Economics Institute)

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    Abstract

    This paper investigates the effects of budget deficits within a classical-Harrodian framework in a closed economy. In this framework, growth and cycles are endogenous, underutilized capacity is a recurrent phenomenon, capacity utilization fluctuates around the normal level in the long run, and unemployment is persistent. Give the normal rate of profit, the key determinant of growth is the social savings rate. Along the warranted path when growth is balanced and is financed via retained earnings and equity, the social savings rate can be shown to be equal to the flow of business and household savings less the money and government bond holdings of the aggregate private sector—that is, it equals the flow of investable surplus available to firms to finance investment. An increase in the budget deficit always raises short-run output growth, although the stimulus is slowed down by the accumulation of debt by firms. However, with a fixed private savings rate, an increase in the deficit lowers the warranted path. If raising the warranted path is desired, appropriate policies that would raise the social saving rate would have to be implemented. As in Harrod, whether crowding out is harmful depends on the rate of warranted growth relative to the natural growth rate.

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    File URL: http://128.118.178.162/eps/mac/papers/0012/0012001.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0012001.

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    Length: 34 pages
    Date of creation: 22 Dec 2000
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0012001

    Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 34; figures: included
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    Web page: http://128.118.178.162

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    1. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    2. Jamee K. Moudud, 1998. "Finance And The Macroeconomic Process In a Classical Growth And Cycles Model," Macroeconomics 9811002, EconWPA.
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    14. Jamee K. Moudud, 1998. "Finance and the Macroeconomic Process in a Classical Growth and Cycles Model," Economics Working Paper Archive wp_253, Levy Economics Institute.
    15. repec:fth:harver:1463 is not listed on IDEAS
    16. Taylor, Lance, 1985. "A Stagnationist Model of Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 9(4), pages 383-403, December.
    17. Fazzari, Steven M & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Investment, Financing Decisions, and Tax Policy," American Economic Review, American Economic Association, vol. 78(2), pages 200-205, May.
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    Cited by:
    1. Stephen S. Everhart & Mariusz A. Sumlinski, 2001. "Trends in Private Investment in Developing Countries : Statistics for 1970-2000 and the Impact on Private Investment of Corruption and the Quality of Public Investment," World Bank Publications, The World Bank, number 13989, July.

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