A note on the ‘crowding out’ of private expenditures by bond-financed increases in government spending

In a recent paper in this Journal, Blinder and Solow (1973) examine a dynamic IS-LM model. They prove that bond-financed fiscal policy is ineffective (which is the view of monetarists) only if the basic model is unstable. They claim that empirical evidence for the U.S. suggests that the model is stable, however, so that the evidence supports the proposition that fiscal policy matters. The purpose of this note is to point out an error in the stability condition reported by Blinder and Solow, and to demonstrate that their conclusions about the United States economy are without foundation.