Re: fiscal deficit

["Sean Reilly" <seanjreilly@xxxxxxxxxxx>]

Hi Kazuhiro,

I realized after I sent the message that I had made the error.  I agree with
the difference as you stated it.  Sorry.  The difference is not all that
trivial in my opinion.  Quantity vs. Price are two sides of the same coin in
this situation.

The quantity of investment available to the bad balance sheet firms is
severely shrunk, when there is a lot of fiscal spending (i.e. crowding out).
Hence, the term.  Crowding out refers to those firms not being able to
borrow at a rate that they would have been able to had the government not
been in the bond market.  If the gov't were not in the bond market, then
banks might well have lended to the bad balance sheet firms.  So, it is my
opinion that "credit crunch" is a result of crowding out.

Sean

----- Original Message -----
From: "Kazuhiro Kurose" <kurose@xxxxxxxxxxxxxxxxxxxxxx>
To: "Sean Reilly" <seanjreilly@xxxxxxxxxxx>
Cc: "PKT Listserv" <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, November 12, 2001 8:27 PM
Subject: Re: fiscal deficit


> Hi Sean
>
> > "Because money supply is endogenous,therefore, "crowding out" can't
arise."
> >
> > Theoretically, correct, however what I have seen happen in the real
world
> > this is not the case.  There is a so-called crowding out that takes
place,
> > but businesses call it a credit crunch.  So, in practice, I am not so
sure
> > that I agree with the theory.
>
> I think that "crowding out" is essentially different from "credit crunch".
The former means that a high level of
> interest rate because of fiscal deficit restrains the amount of private
investment. According to my understanding, the
> latter means that banks are reluctant to lend because of, for example, bad
balance sheet. Therefore, the former is
> related to the price, interest rate, and the latter is related to the
quantity rather than the price. Is this trivial
> difference??
>
>  **************************************
>   Kazuhiro Kurose
>   Graduate School of Economics and Business
>   Administration, Hokkaido University
>   Kita 9 Nishi 7, Kita-Ku, Sapporo, Japan
>   060-0809
>     TEL: +81-11-716-2111 ex:2786
>  **************************************
>
>