Why Fiscal Stimulus Programs Fail, Volume 2: Statistical Tests Comparing Monetary Policy to Growth Effects

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https://www.palgrave.com/gp/book/9783030647261 This book scientifically tests the assertion that accommodative monetary policy can eliminate the “crowd out” problem, allowing fiscal stimulus programs (such as tax cuts or increased government spending) to stimulate the economy as intended. It also tests to see if natural growth in th economy can cure the crowd out problem as well or better. The book is intended to be the largest scale scientific test ever performed on this topic. It includes about 800 separate statistical tests on the U.S. economy testing different parts or all of the period 1960 – 2010. These tests focus on whether accommodative monetary policy, which increases the pool of loanable resources, can offset the crowd out problem as well as natural growth in the economy. The book, employing the best scientific methods available to economists for this type of problem, concludes accommodate monetary policy could have, but until the quantitative easing program, Federal Reserve efforts to accommodate fiscal stimulus programs were not large enough to offset more than 23% to 44% of any one year’s crowd out problem. That provides the science part of the answer as to why accommodative monetary policy didn’t accommodate: too little of it was tried. The book also tests whether other increases in loanable funds, occurring because of natural growth in the economy or changes in the savings rate can also offset crowd out.  It concludes they can, and that these changes tend to be several times as effective as accommodative monetary policy.  This book’s companion volume Why Fiscal Stimulus Programs Fail explores the policy implications of these results. Preface Contents List of Figures List of Tables Part I Introductory Chapters 1 Introduction 1.1 The Crowd Out Problem and Accommodative Monetary Policy 1.2 Individual Chapter Contents and Findings 1.2.1 Estimating Crowd Out’s Actual Effects 1.2.2 Total Loanable Funds as a Crowd Out Modifier 1.2.3 Exogenous Loanable Funds Modifiers (FR Securities Purchases) 1.2.4 Endogenous Loanable Funds Modifiers 1.2.5 Summary Chapters 1.3 Summary of Key Findings References 2 Literature Review 2.1 Summary of Findings 2.1.1 Stocks and Bonds 2.1.2 GDP 2.1.3 Inequality 2.2 Detailed Findings 2.2.1 Assessment of Monetary Policy Effectiveness in the Business Press 2.2.1.1 Stock Market Effects 2.2.1.2 Bond Market Effects; Interest Rate Effects 2.2.1.3 GDP Effects 2.2.1.4 Inequality Effects 2.2.2 Assessment of Monetary Policy in the Academic/Professional Literature 2.2.2.1 Stock Market Effects 2.2.2.2 Bond Market Effects; Interest Rate Effects 2.2.2.3 GDP Effects 2.2.2.4 Effects on Inequality 2.2.3 Comparisons of Findings of the Professional and Business Press 2.3 A Comparison of Cowles, DSGE, and VAR Methodologies Used in Literature Review References 3 Methodology 3.1 General Methodological Issues 3.1.1 The Importance of Replicating Results Before Publication 3.2 Other Methodological Issues Specific to This Study 3.3 GDP Deflator Methodological Adjustments 3.4 Reconciling Differences in Signs, Significance Levels of Tests in Different Time Periods 3.4.1 Mixing Periods of Budget Deficit (Crowd Out) Increase and Decrease 3.4.2 Statistical Insignificance Caused by Lack of Variation in the Data 3.4.3 Left-Out Variables 3.4.4 Multicollinearity 3.4.5 Insufficient Sample Size 3.4.6 Spurious Results Indicating Insignificance 3.5 How Should a Change in Loanable Funds Be Distributed to Tax and Spending Deficits 3.6 Other Model Specification Issues: Different Deficit Modifiers Tested References Part II Theory of Crowd Out and Accommodative Monetary Policy 4 Theory of Crowd Out and Accommodative Monetary Policy 4.1 Under What Conditions, Federal Reserve Purchases of Government Securities Can Work to Stimulate the Economy 4.1.1 Overview 4.1.2 Detailed Analysis of the Crowd Out and Accommodative Monetary Policy Processes 4.1.2.1 Accommodative Federal Reserve Purchases from Depository Institutions 4.1.2.2 Federal Reserve Purchases from Non-Depository Institutions 4.2 A Formal Model of the Effects of Fiscal Stimulus Programs, Their Crowd Out Effects, and How Accommodative Monetary Policy Can Offset Crowd Out Effects, Allowing the Fiscal Stimulus to Work 4.2.1 Crowd Out Effects of Deficit Financing 4.2.2 How Accommodating Monetary Policy Offsets Crowd Out Effects 4.2.2.1 Differing Crowd Out Effects of Tax Cut and Spending Deficits 4.2.2.2 Alternative Ways of Modeling Crowd Out Effects 4.2.2.3 Investment Models with and Without Stand-Alone (LF) Variables 4.2.2.4 Declining Deficits Cause “Crowd in” Effects 4.2.3 Should We Use Accommodate Monetary Policy to Offset Crowd Out? References Part III The Effectiveness of Accommodating Monetary Policy Mechanics 5 The Role of Primary Dealers, Investment Banks and Foreign Banks in Federal Reserve Efforts to Change Bank Reserves and the Money Supply 5.1 Primary Dealers Dominate Auctions 5.1.1 What Type of Bank Does the Federal Reserve Purchase Securities from: Investment or Depository? 5.2 Loss of Efficiency When Using Investment Banks and Brokerages to Implement Accommodative Monetary Policy 5.3 Primary Dealers Who Are Domestic Vs. Foreign Corporations 5.4 The Failure of Accommodative Monetary Policy before Quantitative Easing (QE) and Its Success After; The “Pushing on a String Problem” 5.4.1 Effectiveness of Accommodative Monetary Policy 1960–2007 5.4.2 Effectiveness of Accommodative Monetary Policy 2008–Present 5.5 Historical Data on FR Purchases of Government Securities, Reserves, M1 and the Monetary Base References Part IV Does Crowd Out Really Occur? 6 Does Crowd Out Really Occur? Initial Empirical Evidence—One Time Period 6.1 Consumption 6.2 Investment 6.3 Conclusion References 7 Does Crowd Out Really Occur? Empirical Evidence—Replication in Many Time Periods 7.1 The Heim (2017b) Study 7.2 The Heim (2017a) Study 7.3 Crowd Out Findings in This Study References Part V Increases in Total Loanable Funds—Do They Reduce Crowd Out? 8 Initial Tests of Whether Crowd Out Can Be Offset by Increases in Loanable Funds 8.1 Methodology for Testing Increases in Loanable Funds as an Offset to Consumption Crowd Out 8.1.1 Separating the Positive and Negative Effects of an Increase in Loanable Funds on Consumption 8.2 Taxes: Another Variable that Has Both Positive and Negative Effects on Consumption 8.3 Methodology for Testing Increases in Loanable Funds as an Offset to Investment Crowd Out 8.4 Conclusions References 9 Which Models Best Explain How Changes in Loanable Funds Offset Crowd Out? 9.1 Effects on the Consumption Function 9.2 Effects on the Investment Function References 10 Do Loanable Funds Modify the Crowd Out Effects of the One-Variable Deficit (T - G)? 10.1 Consumption Results When also Including (S + FB) as a Separate Variable 10.2 Consumption Results When Not Including (S + FB) as a Separate Variable 10.3 Investment Results When also Including (S + FB) as a Separate Variable 10.4 Investment Results When Not Including (S + FB) as a Separate Variable 10.5 Comparing the Effects of Exogenous (FR Purchases Induced) and Endogenous (Economic Driven Change Induced) Loanable Funds Growth 10.5.1 Effects on Consumption 10.5.2 Effects on Investment 10.6 Conclusions Reference 11 Do Loanable Funds Modify the Crowd Out Effects of the Two-Variable Deficit (T), (G)? 11.1 Testing the Two: Variable Deficit Consumption Model 11.1.1 Mixing Crowd Out and Crowd in Periods May Distort Results 11.1.1.1 Adding a Separate, Stand-Alone Loanable Funds Variable to a Crowd Out Model 11.1.1.2 Can Table 11.1 Results Be Replicated in Other Samples? 11.1.1.3 Comparing One-Variable and Two-Variable Deficit Results 11.1.1.4 Heteroskedasticity (or Heteroscedasticity) and Autocorrelations 11.2 Consumption Models Without Stand Alone (S + FB) 11.3 Crowd Out Effects on Investment Using Stand-Alone Loanable Funds Variable 11.4 Crowd Out Effects in Investment Models Without a Stand-Alone Loanable Funds Variable 11.5 Chapter Summary References Part VI Comparing M1 and Total Loanable Finds Effects on Crowd Out 12 Does M1 More Accurately Define the Extent to Which Crowd Out Can Be Modified Than Total Loanable Funds? 12.1 Testing the Consumption Model 12.2 Testing the Two-Variable Deficit Investment Model 12.2.1 Investment Models with a Stand-Alone Loanable Funds Modifier 12.2.2 Investment Models Without a Stand-Alone Loanable Funds Modifier 12.2.3 Investment Models Without a Stand-Alone Loanable Funds or M1 Modifier, but with a Business Cycle Control Variable 12.3 Comparing Model Results with (Table 12.5) and Without (Table 12.4) GDP Control 12.4 Summary of Chapter 12 Results Reference Part VII Exogenous Increases in Loanable Funds (Fr Security Purchases): Effects on Crowd Out 13 Alternate Ways of Modeling How Deficit Variables Modified by Accommodative Monetary Policy Reduce Crowd Out (Bernanke, Mankiw Definitions of Accommodative Monetary Policy) 13.1 Effects of FR Securities Purchases on Consumption 13.2 Summary of Results and Conclusions for Chapter 13 References 14 Does Modification of the Single Variable Deficit (T - G) by FR Purchases Better Measure Crowd Out, Controlling for Endogenous Loanable Funds Growth? 14.1 Summary of Consumption Test Results for Different Sample Periods 14.2 Summary of Investment Test Results for Different Periods 14.3 Summary of Chapter 14 Consumption and Investment Findings and Conclusions Reference 15 Does Modification of the Two-Variable Deficit (T) (G) by FR Purchases Better Measure Crowd Out, Controlling for Endogenous Loanable Funds Growth? 15.1 Testing the Two-Variable Deficit Consumption Model 15.2 Testing the Two-Variable Deficit Investment Model 15.3 Summary of Chapter 15 Results from 2 Variable Deficit Models Reference 16 Do FR Purchases, Used as Deficit Modifiers, Reduce Crowd Out, Controlling for the Level of Private Saving and Foreign Borrowing 16.1 Summary of Consumption Test Results for Different Sample Periods 16.2 Summary of Investment Test Results for Different Periods 16.3 Conclusions 16.4 Have FR Securities Purchases Been Pro or Contracyclical? References 17 Do FR Security Purchases, Used as 2 Variable Deficit Modifiers, Reduce Crowd Out, Controlling for Private Savings? 17.1 Testing the Two-Variable Deficit Consumption Model 17.2 Testing the Two-Variable Deficit Investment Model 17.3 Summary of Chapter 17 Results from 2 Variable Deficit Models Reference 18 Do FR Purchases Reduce Crowd Out Effects, Controlling for Other Types of Loanable Funds? 18.1 Testing the Two—Variable Deficit Consumption Model 18.2 Testing the Two-Variable Deficit Consumption Model 18.3 Adding a Separate Loanable Funds Variable to the Consumption Model 18.4 The Consumption Model Without a Separate Loanable Funds Variable 18.5 Testing the Two-Variable Deficit Investment Model 18.5.1 Crowd Out Effects in Models with an Endogenous Loanable Funds Control Variable 18.6 Crowd Out Effects in Models Without an Endogenous Loanable Funds Control Variable 18.7 Chapter 18 Summary and Conclusions Reference 19 Effects of Accommodative Monetary Policy on Crowd Out Before and After Quantitative Easing. Does “Pushing on a String” Occur? Part VIII Endogenous Increases in Loanable Funds: Effects on Crowd Out 20 Is Endogenous Total Loanable Funds a Better Modifier Than Total Loanable Funds? 20.1 Testing the Consumption Model 20.2 Investment Models Using the (S + FB) or (S + FB) - (Tr + a) Modifier 20.3 Summary and Conclusions Reference 21 Comparing Various Stand-Alone Endogenous Loanable Funds, and FR Securities Purchases Variables Models 21.1 Statistical Significance of the Total Loanable Funds Variable When Added to the Standard Consumption Model 21.2 Statistical Significance of the FR Security Purchases Variable When Added to the Standard Consumption Model 21.3 Statistical Significance of the Combined Loanable Funds and FR Security Purchases Variable When Added to the Standard Consumption Model 21.4 Statistical Significance of Separate Loanable Funds and FR Security Purchases Variables When Added to the Standard Consumption Model 21.5 Statistical Significance of Separate National Savings (Instead of (S + FB)) and FR Security Purchases Variables When Added to the Standard Consumption Model 21.6 Statistical Significance When Separate Loanable Funds Net of FR Security Purchases and Separate FR Security Purchases Variables When Added to the Standard Consumption Model 21.6.1 Investment Model Tests 21.7 Statistical Significance of the Total Loanable Funds Variable (S + FB) When Added to the Standard Investment Model 21.8 Statistical Significance of the FR Securities Purchases Variable (Tr + A) When Added to the Standard Investment Model 21.9 Statistical Significance of the Combined Loanable Funds (S + FB) and FR Securities Purchases Variable (Tr + A) When Added to the Standard Investment Model 21.10 Statistical Significance When Separate Loanable Funds and FR Securities Purchases Variables Are Added to the Standard Investment Model 21.11 Statistical Significance of Separate National Savings and FR Securities Purchases Variables When Added to the Standard Investment Model 21.12 Statistical Significance of a Separate Endogenous Loanable Funds Variable (LF - FR Purchases), and a Separate FR Securities Purchases Variables When Added to the Standard Investment Model 21.13 Summary of Chapter Results and Conclusions Reference 22 Total and Endogenous Parts of Loanable Funds as a Stand Alone Deficit Modifiers: Comparison of Cptrs. 11, 18, 21 and 24 Test Results 22.1 Comparing Chapters 11 and 18 Stand-Alone Loanable Funds Variables 22.2 Comparing Chapters 11, 18, 21, and 24 Results on What Type of Loanable Fund Best Offsets Crowd Out 22.3 Chapter 22 Conclusions 23 Difficulties Comparatively Testing Total Loanable Funds and Endogenous Loanable Funds Only in the Same Model 24 Comparing Endogenous and Total Loanable Funds Modifiers to Deficit Variables 24.1 Testing the Two-Variable Deficit Consumption Model 24.2 Consumption Comparisons in Models with a Separate Loanable Funds Control Variable 24.3 Consumption Comparisons in Models Without a Separate Loanable Funds Control Variable 24.4 Testing the Two-Variable Deficit Investment Model 24.4.1 Investment Comparisons in Models with a Separate Loanable Funds Control Variable 24.4.2 Investment Comparisons in Models Without a Separate Loanable Funds Control Variable 24.4.3 Investment Comparisons in Models Without a Separate Loanable Funds Control Variable, but with an Added GDP Control Variable 24.5 Summary and Conclusions Reference Part IX Summary Chapters 25 Summary of Introductory. Literature Review, and Methodology Chapters (Cptrs 1–3) 25.1 Cptr. 1. Deficits, Crowd Out, and Accommodative Monetary Theory 25.1.1 Actual Accommodative Monetary Policy—Chapters 4–5 25.1.2 Accommodative Monetary Science Chapters 6–24 25.2 Cptr. 2 Summary—Literature Review 25.3 Cptr. 3: Methodology 26 Summary of Crowd Out Theory and Accommodative Monetary Policy Theory (Chapters 4–5) 26.1 Chapter 4—Theory of Crowd Out and Accommodative Monetary Policy 26.2 Chapter 5: The Effectiveness of Accommodating Monetary Policy—The Mechanics 27 Summary of the Science Showing “Crowd Out” Exists and Accommodative Monetary Policy Can Offset It 27.1 Do Changes in Federal Reserve Security Purchases to Offset Crowd Out and Stimulate the Economy Lead to “Pushing on a String” Effects? (Chapter 19) 27.2 Does Stimulative Fiscal Policy Create a “Crowd Out” Problem that Reduces Consumer and Investment Spending, Causing the Fiscal Policies to Be Ineffective? (Cptrs 6, 7, 10–11) 27.3 Does Growth in M1 Offset Crowd Out as Well as Growth in Total Loanable Funds Pool? (Cptr. 12) 27.4 Can Increases in the Total Loanable Funds Pool, Either Endogenously, or Exogenously Through Accommodative FR Increases in Bank Reserves, Offset the Crowd Out Effects of Stimulative Fiscal Policy? (Chapters 8–9, 10–11, 19) 27.5 Are Alternatives to the Total LF Variable Better Crowd Out Modifiers? (Cptrs. 12–24) 27.6 Comparing the Effects of Endogenous and Exogenous Loanable Funds on the Real Economy and Financial Markets? (Cptrs. 10, 20, 21) 27.7 Total Loanable Funds Compared to Alternative Modifiers Reference Part X Overall Conclusions, Definitions and Engineering Equations 28 Overall Conclusions 29 Acronyms Used to Define Variables in Equations 30 Summary of Engineering Quality Equations in This Book 30.1 Do Deficits Really Cause Crowd out? 30.2 Changes in M1, or Loanable Funds: Which Affect the GDP’s Components More?—Using Full Structural Models to Control for Other Variables’ Effects (Table 12.5) 30.3 Which is the More Accurate Measure of Consumer Crowd Out? The Size of the Deficit alone, or the Deficit Minus any Same Period Increase in the Pool of Loanable Funds? (1 and 2 Variable Deficit Models Tested) 30.4 Which is a Better Measure of Investment Crowd Out? The Deficit, or the Deficit Reduced by any Same Period Growth in the Pool of Loanable Funds (1 and 2 Variable Deficit Models)? 30.5 Do Endogenous or Exogenous Increases in Loanable Funds Have the Most Success in Reducing Crowd Out? 30.5.1 Comparing Endogenous and Exogenous Loanable Funds Effects on Consumption—Initial Model 30.5.2 An Alternative Model Comparing Endogenous and Exogenous Effects 30.6 Do Increases in Loanable Funds Increase Consumer and Business Borrowing? Does Increased Business Borrowing Decrease Consumer Borrowing? (Results Taken from Heim 2021; Equation Numbers are from that Book) Index