tag:blogger.com,1999:blog-8595404115121834255.post6679556158776309868..comments2024-03-28T03:24:05.678-04:00Comments on NAKED KEYNESIANISM: Crowding out: what's the evidence?Matias Vernengohttp://www.blogger.com/profile/09521604894748538215noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-8595404115121834255.post-5021034023013968092015-02-19T03:29:27.190-05:002015-02-19T03:29:27.190-05:00...and besides this, there is the fact that the in......and besides this, there is the fact that the interest rate has little or no effect on private non-residential investment. So even if higher deficits implied higher interest rates (which is false, as your post argues), this would discourage perhaps some residential investment and consumer credit, but not productive investment. Your post made me wonder whether it was this lack of evidence for crowding out of investment which led neoclassical macroeconomists to explore other ways to deny the positive effect of public deficits, like lifetime-income models in which deficits depress private consumption and so on.daniele girardihttp://www.reconomics.it/noreply@blogger.comtag:blogger.com,1999:blog-8595404115121834255.post-65171405939536739502015-02-16T13:07:57.379-05:002015-02-16T13:07:57.379-05:00"Not just because normally the Fed controls j..."Not just because normally the Fed controls just the short rate, but more importantly because there is a secondary market for bonds, and arguably it could happen that as fiscal deficits increase, bond holders demand higher rates of interest in order to hold long term bonds"<br /><br />TSY is under no obligation to issue long term securities, even if that were to happen (which it never has in a floating FX regime), TSY could isssue nothing but 3-mo T-bills if it wanted to. Thats what being sovereign means, the govt is in control of its finances. If the Fed were to announce a permanent ZIRP policy, 10 year T-note rates would never go to 10% unless inflation got that high. Deficits by themselves have nothing to do with longer term interest rates. Long term rates are a function of Fed FFR expectations + inflation expectations, so maybe you could make the argument that large deficits beyond full employment driving high inflation would cause increased rates or expectations that because of high inflation that the Fed was going to raise the FFR that high per its reaction function. But what does any of this have to do with crowding out? Anonymoushttps://www.blogger.com/profile/15433129947896088098noreply@blogger.comtag:blogger.com,1999:blog-8595404115121834255.post-17112452650644016682015-02-16T09:57:18.003-05:002015-02-16T09:57:18.003-05:00Hi Auburn, yes open market operations are used to ...Hi Auburn, yes open market operations are used to control the rate of interest, and as you note in some circumstances (not common) the Fed tries to control the long run rate. But that is hardly evidence. Not just because normally the Fed controls just the short rate, but more importantly because there is a secondary market for bonds, and arguably it could happen that as fiscal deficits increase, bond holders demand higher rates of interest in order to hold long term bonds. Again, the evidence for that is weak at best, and the Fed could, even in those circumstances, intervene to bring the long term down, as they did during the Great Depression, and more recently.Matias Vernengohttps://www.blogger.com/profile/09521604894748538215noreply@blogger.comtag:blogger.com,1999:blog-8595404115121834255.post-85935397434514915872015-02-15T17:26:04.803-05:002015-02-15T17:26:04.803-05:00$ injections drive down interest rates by definiti...$ injections drive down interest rates by definition as QE demonstrates. Thats the purpose of issuing securities, to remove excess reserves from the federal funds market. So deficits are neutral wrt interest rates when accompanied by dollar for dollar securities issuance. Accounting is all the evidence we need to understand this process.Anonymoushttps://www.blogger.com/profile/15433129947896088098noreply@blogger.comtag:blogger.com,1999:blog-8595404115121834255.post-21841379634343860842015-02-15T13:02:01.063-05:002015-02-15T13:02:01.063-05:00The rate of interest going up, that would be the t...The rate of interest going up, that would be the traditional response. There isn't much evidence for that.Matias Vernengohttps://www.blogger.com/profile/09521604894748538215noreply@blogger.comtag:blogger.com,1999:blog-8595404115121834255.post-66271307609310408402015-02-15T10:19:41.163-05:002015-02-15T10:19:41.163-05:00Govt spending adds dollars to the economy
Govt tax...Govt spending adds dollars to the economy<br />Govt taxation removes dollars from the economy<br />Therefore, Govt deficits = net addition of dollars to the economy<br /><br />So how in the world can deficits crowd out the private sector when they add dollars? As far as empirical questions go, it doesnt get any easier than this. Just another in a long line of examples of how unbelievably irrelevant mainstream economics is, that people still believe something so obviously false.Anonymoushttps://www.blogger.com/profile/15433129947896088098noreply@blogger.com