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

Deepankar Basu ()
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Deepankar Basu: University of Massachusetts Amherst

UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

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.

Keywords: paradox of thrift; crowding-in; instrumental variables. (search for similar items in EconPapers)
Date: 2009-11
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