‘Crowding out’ and the effectiveness of fiscal policy

‘Crowding out’ of private economic activity by public economic activity is a multidimensional concept. A taxonomy is proposed: the degree of crowding out, the time horizon considered, direct and indirect crowding out constitute the four main categories. The latter two each have many subcategories. With direct crowding out government economic activity directly enters as an agrument into structural private behavioural relationships. Indirect crowding out refers to crowding out in the reduced form of the model without there being any direct crowding out at the level of the structural private behavioural relationships. A small full employment model is used to analyse the implications of various forms of direct crowding out for the effectiveness of fiscal policy.