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Macroeconomic Models and the Determination of Crowding Out

  • Lee C. Spector


    (Department of Economics, Ball State University)

The importance of crowding out has been an ongoing question in the Economics literature for many years. Some economists believe that deficits replace private spending while other economists feel that most of this crowding out is offset by Ricardian equivalence. In an attempt to resolve this controversy, many economists have formulated macroeconomic models and have used these models to empirically test the notion of crowding out. This paper revisits this methodology. It examines four useful macroeconomic models and shows the relationship between the model assumed, the empirical results obtained and the conclusions concerning crowding out. We demonstrate that the same empirical results may be obtained from different models, but can yield very different conclusions concerning crowding out. It is concluded that the answer to this controversy involves, in part, a more complete understanding of the structural foundations of the macroeconomic models being tested.

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Paper provided by Ball State University, Department of Economics in its series Working Papers with number 200511.

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Length: 23 pages
Date of creation: Dec 2005
Date of revision: Mar 2006
Publication status: Published in Public Finance/Finances Publiques 54 (2005): 84 – 98.
Handle: RePEc:bsu:wpaper:200511
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