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Crowding In or Crowding Out? A Classical-Harrodian Perspective

  • Jamee K. Moudud

    (Jerome Levy Economics Institute)

Registered author(s):

    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://econwpa.repec.org/eps/mac/papers/0012/0012001.pdf
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    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
    Contact details of provider: Web page: http://econwpa.repec.org

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    1. Jamee K. Moudud, 1998. "Finance And The Macroeconomic Process In a Classical Growth And Cycles Model," Macroeconomics 9811002, EconWPA.
    2. 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.
    3. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    4. 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.
    5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    6. Philip Arestis & Malcolm Sawyer, 1998. "The Macroeconomics of Industrial Strategy," Macroeconomics 9808002, EconWPA.
    7. Martin Feldstein, 1982. "Capital Taxation," NBER Working Papers 0877, National Bureau of Economic Research, Inc.
    8. 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.
    9. L. R. Wray, 1990. "Money and Credit in Capitalist Economies," Books, Edward Elgar, number 474, December.
    10. Wynne Godley & B. Anwar Shaikh, 1998. "An Important Inconsistency at the Heart of the Standard Macroeconomic Model," Macroeconomics 9805021, EconWPA.
    11. 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.
    12. repec:fth:harver:1463 is not listed on IDEAS
    13. Jamee K. Moudud, 1999. "Finance in a Classical and Harrodian Cyclical Growth Model," Economics Working Paper Archive wp_290, Levy Economics Institute.
    14. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    15. repec:cup:cbooks:9780521564793 is not listed on IDEAS
    16. 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.
    17. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
    18. Taylor, Lance, 1985. "A Stagnationist Model of Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 9(4), pages 383-403, December.
    19. 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.
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