Date of Award
Doctor of Philosophy (PhD)
Economics / Economic Policy
William M. Scarth
The purpose of this study is to explore the implications for various government stabilization policies of explicit consideration of market disequilibrium, especially credit the commercial bank loan market. The analysis centers in each case on the value of the government expenditure multiplier.
First, a control or equilibrium version of the model is developed which is consistent with standard macrotheory and which contains a well-described banking sector. The results of the simulations with this version of the model confirm that the impact multiplier is larger when the deficit is financed by printing money than when bonds are issued to meet the requirement for funds. However, it is shown that in the long run the bond-financed multiplier is greater than the money-financed multiplier. This version of the model also confirms the possibility raised in the current literature that the bond-financed case may be unstable.
Since the current model has a well developed banking sector, the theory of the government finance restraint is extended to consider the case in which the deficit is financed by transferring the ownership of government bank deposits to the private sector. This case closely resembles the bond-financed case in the short run but it is statically stable. The deposit-financed case is limited, of course, by the initial size of the government deposits. Therefore, the restoration of the level of government deposits by one of the other means of financing is considered.
Next, a disequilibrium version of the control model is developed consistent with current literature on disequilibrium phenomena. This version of the model contains a feedback mechanism by which a disequilibrium in one market will affect the decisions in all other markets.
The results of the simulations with the disequilibrium model show that the government expenditure impact multiplier may be increased by the presence of credit rationing. In fact the bond-financed case which is unstable in the control version becomes stable under "equilibrium" credit rationing, where the loan rate does not adjust at all.
Since the model used in this study is ad hoc, sensitivity analysis is used to investigate the importance of the exact values of the key parameters of the system. The policy implications of the study do appear to hing on the values of the feedback coefficients. If the force of credit rationing is mainly felt in the real sector, the government expenditure impact multiplier will be smaller in the disequilibrium version than the control model. On the other hand, if the impact of credit rationing is mainly felt in the financial sector, the opposite result will occur. However, the range of values that the multiplier may take on, depending on the impact of the credit rationing, is quite small.
Thus, given the size of the error of prediction of standard models, this study concludes that it is unlikely that the inclusion of credit rationing will allow a better evaluation of government stabilization policies. This is especially true if the impact of credit rationing is believed to be in roughly the same proportion as normal expenditures in the various markets.
Brox, James Allan, "A Simulation Study of Disequilibrium Macro Model with Special Reference to the Theory of Credit Rationing" (1975). Open Access Dissertations and Theses. Paper 3030.