Alternatives to Financing Stimulus Programs with Domestic Borrowing

Abstract

This chapter notes that while theoretically, increasing the money supply (“accommodating monetary policy”) should prevent crowd out effects, this study did not find that changing the M1 money supply alleviated crowd out. The chapter offers the hypothesis (untested) it may be because the Federal Reserve’s principal method of increasing the M1 money supply mechanically funnels the money principally to investors selling securities so as to be able to buy other securities (which generally does not affect the GDP), not to the general population, who would be more likely to use it to buy real goods and services, stimulating the GDP.