Is the Treasury’s Monetary Policy Effective?
Employment, Interest, And Money submits: For decades, many economists have argued that the effectiveness of fiscal policy is limited because public borrowing “crowds out” private investment. There are several versions of the “crowding out” story. One version goes something like this: There is a certain amount of money in circulation, which people are holding in their portfolios along with other assets. Money is a special kind of asset, because it’s the only one that can be used to make payments. Therefore people like to hold a certain fraction of their assets in the form of money. (For simplicity, let’s take the plausible case where it’s a constant fraction, independent of their total quantity of assets.) When the government borrows, it introduces new non-money assets (government securities, in this case) into the system. That means that the fraction of money in people’s portfolios is now too small, since their total assets have increased but money has not. They will compensate by redu
