A simple model of the effects of wealth and deficit-financing on the Malaysian economy
Date
1982-06
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Abstract
The objective of this paper is to study the effects of the different financing schemes of the government on the multiplier. This entails an investigation of the effects the stock of wealth has on private consumption and on the rate of interest. It further tests for the existence of any financial crowding-out of private investment demand. Crowding-out here means the curtailing of private investment induced through the negative effect on investment due to the income-induced rise in the interest rate. The model used includes the stock of wealth as a variable in the consumption function and the demand for money function. A government budget constraint is added to capture the crowding-out phenomenon. Due to the limited number of observations available, the ordinary least-squares method of estimation is used on the four behavioral equations. The results show that a significant influence is exerted by wealth on private consumption behavior, but its effect on interest rate is weakened by the numerous controls exercised by the Central Bank. Extreme crowding-out of financial market is not pronounced in the analysis. On the contrary, government expenditures are expansionary, even when financed by new bond issues. The increase in money supply may also have contributed in counteracting the weak contractionary effect of bond-finance via the interest rate, if this exists.