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Which Models Best Explain How Changes in Loanable Funds Offset Crowd Out?

In: Why Fiscal Stimulus Programs Fail, Volume 2

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  • John J. Heim

    (State University of New York)

Abstract

This chapter notes that the growth in the loanable funds pool necessary to offset crowd out may occur for three reasons: increased Fed purchases of securities, growth in the economy which increases incomes, and therefore savings, and by foreign borrowing. Where models best test these methods simply modifying the size of the deficit variable to reflect available loanable funds, or by using a separate loanable funds variable are tested. Results indicate that for consumption, there are two separate effects of a growth in loanable funds which operate in different directions, the stimulus effect of an increase in saving and the negative effect when there is an increase in the mps. Hence, two variables are needed to capture all loanable funds effects. For investment, one variable is usually enough, because an increase in the mps has the same signed effect as the increase in saving.

Suggested Citation

  • John J. Heim, 2021. "Which Models Best Explain How Changes in Loanable Funds Offset Crowd Out?," Springer Books, in: Why Fiscal Stimulus Programs Fail, Volume 2, chapter 0, pages 163-177, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-64727-8_9
    DOI: 10.1007/978-3-030-64727-8_9
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