Macroeconomic Models and the Determination of Crowding Out

Lee Spector

No 200511, Working Papers from Ball State University, Department of Economics

Abstract: 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.

Pages: 23 pages
Date: 2005-12, Revised 2006-03
New Economics Papers: this item is included in nep-mac
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Published in Public Finance/Finances Publiques 54 (2005): 84 – 98.

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http://econfac.bsu.edu/research/workingpapers/bsuecwp200511spector.pdf First version, 2005 (application/pdf)

Related works:
Journal Article: Macroeconomic Models and the Determination of Crowding Out (1999)
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