Crowding In or Crowding Out? A Classical-Harrodian Perspective
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.
|Date of creation:||22 Dec 2000|
|Note:||Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 34; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-1037, October.
- Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
- Robert Pollin, 1991. "Two Theories of Money Supply Endogeneity: Some Empirical Evidence," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 13(3), pages 366-396, April.
- Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
- J. A. Kregel, 1980. "Economic Dynamics and the Theory of Steady Growth: An Historical Essay on Harrod's ‘Knife-edge'," History of Political Economy, Duke University Press, vol. 12(1), pages 97-123, Spring.
- Kurz,Heinz D. & Salvadori,Neri, 1997. "Theory of Production," Cambridge Books, Cambridge University Press, number 9780521588676, August.
- Kurz,Heinz D. & Salvadori,Neri, 1995. "Theory of Production," Cambridge Books, Cambridge University Press, number 9780521443258, October.
- 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.
- Jamee K. Moudud, 1999. "Finance in a Classical and Harrodian Cyclical Growth Model," Economics Working Paper Archive wp_290, Levy Economics Institute.
- repec:fth:harver:1463 is not listed on IDEAS
- 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.
- Taylor, Lance, 1985. "A Stagnationist Model of Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 9(4), pages 383-403, December.
- Jamee K. Moudud, 1998. "Finance And The Macroeconomic Process In a Classical Growth And Cycles Model," Macroeconomics 9811002, EconWPA.
- Wynne Godley & Anwar Shaikh, 2002. "An Important Inconsistency at the Heart of the Standard Macroeconomic Model," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(3), pages 423-441, April.
- Wynne Godley & B. Anwar Shaikh, 1998. "An Important Inconsistency at the Heart of the Standard Macroeconomic Model," Macroeconomics 9805021, EconWPA.
- Wynne Godley & Anwar M. Shaikh, 1998. "An Important Inconsistency at the Heart of the Standard Macroeconomic Model," Economics Working Paper Archive wp_236, Levy Economics Institute.
- Martin Feldstein, 1982. "Capital Taxation," NBER Working Papers 0877, National Bureau of Economic Research, Inc.
- Philip Arestis & Malcolm Sawyer, 1998. "The Macroeconomics of Industrial Strategy," Macroeconomics 9808002, EconWPA.
- Philip Arestis & Malcolm Sawyer, 1998. "The Macroeconomics of Industrial Strategy," Economics Working Paper Archive wp_238, Levy Economics Institute.
- Willem H. Buiter & James Tobin, 1978. "Fiscal and Monetary Policies, Capital Formation, and Economic Activity," Cowles Foundation Discussion Papers 512, Cowles Foundation for Research in Economics, Yale University.
- Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 393-411, July.
- L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar Publishing, number 474.
- Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0012001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.