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The Paradox of Thrift and Crowding-In of Private Investment in a Simple IS-LM Model

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  • Deepankar Basu

    (University of Massachusetts Amherst)

Abstract

This paper derives conditions for two key Keynesian propositions in a simple IS-LM model: (a) the paradox of thrift, and (b) the crowding-in of private investment expenditures by government expenditures. A linear speci cation of the model is then presented as a special case that can be used for empirical analysis. Using data for the US economy for the period 1959-2009, time series estimation of the linear model using instrumental variables regression shows that the paradox of thrift and crowding-in are real possibilities, especially in the sub-period, 1974-2009, that excludes the Golden Age of capitalism. JEL Categories: E12, E20.

Suggested Citation

  • Deepankar Basu, 2009. "The Paradox of Thrift and Crowding-In of Private Investment in a Simple IS-LM Model," UMASS Amherst Economics Working Papers 2009-14, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2009-14
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    References listed on IDEAS

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    1. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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