OES Government spending displace a near equal amount of private spending? This notion, popularly known as the "crowding-out" effect of Government expenditures, has recently gained widespread attention at two levels. Fii-st, at the policy level, public officials have expressed concern, that massive current and projected Federal deficits will have a deleterious effect on private capital expenditures for some time to come. Second, at the academic level, "crowding out" is at least one of the issues which helps to distinguish between followers of the t\vo major macroeconomic schools of thought Keynesians and monetarists. This article focuses on "crowding out" from more of an academic than a practical policy point of view. Policy implications can he drawn from this discussion, but, for the most part, the abstract economic models used in academic circles are not easily adaptable to observable phenomena. Yet the origins of the recent crowding-out controversy at the academic level are traceable to certain empirical results based on U.S. experience. New research has been conducted in this area and some old arguments have been revived.

. 1 The St. Louis equation is an estimated relationship (using the Almon procedure) betsveen changes in total spending (GNP) and changes in the money supply and high-employment Federal expenditures. The focus of the Andersen-Jordan article was on the relative impact of monetary and fiscal actions. They rejected the propositions that the response of economic activity to fiscal actions relative to monetary actions was (1) larger, (2) more predictable, and (3) faster. In fact, their results suggested that the overall effect of fiscal actions was relatively small and not statistically significant. It was this result that generated considerable controversy among members of the economics profession. 2 The conventional wisdom of the time was that fiscal actions (whether in the form of a maintained increase in expenditures or a tax cut) did have an impact on economic activity, with a multiplier usually estimated at about 1.5 or greater. 3In a recent article, Benjamin Friedman pamblished updated estimates of the St. Louis equation. 4 According to Friedman, the St. Louis equation now "believes in" fiscal policy. He presented results showing that the St. Louis equation yields a significant government spending multiplier of about 1.5 when estimated with data through second quarter 1976. This result conforms with neo-Keynesian thinking. At the same time, Friedman duly noted that with these updated estimates the relatively strong impact of monetary actions continues to hold.

I. HE MONETARIST VIEW that changes in the money stock area primary determinant of changes in total spending, and should thereby be given major emphasis in economic stabilization programs, has been of growing interest in recent years. From the mid-1930's to the mid-1960's. monetary policy received little emphasis in economic stabilization policy. Presumed failure of monetary policy during the early years of the Great Depression, along with the development and general acceptance of Keynesian economics, resulted in a main emphasis on fiscal actions-Federal Government spending and taxing programsin economic stabilization plans. Monetary policy, insofar as it received any attention, was generally expressed in terms of market rates of interest. Growing recognition of the importance of money and other monetary aggregates in the determination of spending, output, and prices has been fostered by the apparent failure of stabilization policy to curb the inflation of the last half of the l 96 0's. Sharply rising market interest rates w'ere interpreted to indicate significant monetary restraint, while the Revenue and Expenditure Control Act of 1968 was considered a major move toward fiscal restraint. Despite these policy developments, total spending continued to rise rapidly until late 1969, and the rate of inflation accelerated. Those holding to the monetarist view were not surprised by this lack of success aOffering helpful suggestions throughout the study were Denis Karnosky of this bank, William P. Yohe of Duke University and visiting Scholar at this bank, 1969-70, and David Fand of Wayne State University. Susan Smith provided programming assistance and Christopher Babb and H. Albert Margolis advised on statistical problems. The authors thank the following for their comments on earlier drafts, without implying their endorsement of either the methods of analysis or the conclusions F.

S_ HE nmnmnetarist view ti-nat n:l'nanges in the innmney stnmn:k are a primary determinant of changes in total spending, and should thereby be given major emphasis iii economic stabilization pr-ogr'aniis, Imas been of growing interest in recent year's, From the mid-I 930s to the mid-h 960s, mnmnetary policy r'en:eived little emphasis mm economic stabilizatmnmn polky, Pn-esumn,d failnre of unotietaty policy during tite emtr-ly yd,ar's nif time Great iJepression, along with the developniment and genen-al an:n:eptann:e of Keynesian en:nmnonhics, resulted in a main ennphasis orm fiscal actinmnms -federal gover'nnnenmt speimdimmg mit-nd taxing programs -in en:ninomic stabilizatioti plans Mninn,tar'v policy, insofar mts it n't,cn,ived any attentiomm, was genet'ally expressed in ten'nms of nmam'ket t'ates of intet'est, Gr'nmmving m'en:nmgnition of thme inm-npon'tar'ice of notmey armnl othmen' motmetary aggr'egates in the deterrninatinmrm of spending, output, and prices has Imeeti fnistered by the appat-ent failut-e of stabilizatinmn pnmlicy to cur'b the inflation of the last half of thn, l9GOs, Sharply rising market immterest rates wet-c interpreted to indicate significanmt niommetarv restrainmt, wimihe the Revenue and Expetmditun-e Contn'ol Act of 1968 was cnmnsinln,red a major' moyn~towanil fisn:al r'n~str'aint, Despite these pohicy developments, total spending continued to rise t-apidly until latn, 1969, and tb-ic i-ate of inflation acceln,rated, 't'hosn, holding to ti-ne nhhonetan'ist view wem'e not sun-pt-msed by this lack nif sun:cess in curbing excessive growth iii total spending, lat-gely because the motey stock grew at a historically m'apid r'ate during time four years n~ndingin late 1968. Ecnmnonic developnments fronm 1965 tlmrough 1969 were in genen-al agm'eement witim tIme expectations of thn, tnonetan'ist view, This article develops a mnidel (lesigned to anmalyze n,conomic stabilization issues withitm a fr'amewor'k whichm focuses nit-I the influetmn:e of nmmonetamy n,xparmsion on total spenmding. Mnmst of time tnajnit' econonm-netr'ic niodels imave nnit assigned at-n in-npnmt'titnt n-nun, to the tinorney ston:k n-nt-tn-n any othmen' tnone tam)' aggm'egate,' F'urtbmen'mnore, most ecotmnitnetr'in: nmodels corttaiti a iar'ge tmnnmhmer of hiehavinir'al hypotheses to be enlipici-

I, HE current economic situation of high interest rates, high unemployment and large federal deficits has prompted a call for a change in the mix of stabilization policies. The current mnix seems to be one of "easy" fiscal policy and "tight" monetary policy. Many analysts feel the mix should be shifted toward "tighter" fiscal policy and "easier" monetary policy, ostensibly for purposes of putting the economy on the path to recovery. Jamnes Toiin, for example, recently stated that: the mix of policies is unhealthy. To achieve a solid recovery, such as the administration projects, and to achieye it withommt astronomical interest rates and serious crowding out, we need an easier monetary policy comhined with a tighter fiscal policy.' Economists at the Brookings Institution have expressed a similar view: Beyond 1982, the key to an improved economic situation must lie in a realigmument of economic policya shift in the mix of fiscal and monetary policy, by matching reductions of future budget deficits with an easier monetary policy. As presently constituted, fiscal and monetary policies appear to he on a collision course 2 The Congressional Budget Office talks of the clash between mnonetary and fiscal policy: Statements from the Federal Reserve suggest that monetary policy will continue its anti-inflationary '