OUTSIDE WEALTH, THE DEMAND FOR MONEY AND THE CROWDING OUT EFFECT

Policy simulations with most large macroeconometric models evidence little, if any, crowding out of private spending from debt financed increases in government expenditures. Examination of the structure of these models reveals that none allows for a wealth effect of debt finance on the demand for money, even though theoretical studies suggest that this wealth effect may cause significant crowding out. This paper provides empirical evidence that increases in government debt held by the public do increase the demand for money; therefore, the fiscal policy simulations of the large macroeconometric models may yield biased conclusions concerning the crowding out effect. © 1979.