Crowding out: the real issues
Keywords:Financial crowding-out, investment, interest rate, full employment
The present work reviews the debate on financial crowding-out in an economy with slack resources. Although this has been described as the academic approach to crowding-out, it has proved to be useful in helping to break the deeply engrained neo-Keynesian habit of assuming that the supply of funds is always fully accommodating. The removal of this special assumption amounts in effect to an acceptance of the earlier and wrongly ousted view that saving and investment can directly affect the rate of interest, especially in the short run. The author then considers the practical task of bringing financial crowding-out into an appropriate relationship with crowding-out in real terms and the changing meaning of the term “full employment”.
JEL: E22, E24, E43, E62