Stabilization policy, which is contained in fiscal and monetary policy, reduces economic fluctuations that result from the business cycle by stabilising aggregate demand through changes in budgetary expenditures. Criticism of the ineffectiveness of this policy indicates that increase in state budgetary expenditures carries with it increased demand for credit on the part of the state and contributes to competition as to funds in the credit market between the government and private sectors. As a consequence, an increase in the value of public loans causes a drop in the value of private loans. Increased public expenditures contribute to an even greater slump in private expenditures than would result solely from the economic climate deterioration. The occurrence of this phenomenon, which is known as the crowding-out effect, is a subject of controversy among economists.

The purpose of this article is to assess whether the effect of crowding out of private expenditures by public expenditures through the credit market occurs in the Polish economy. The assessment is based on empirical data for the years 1996-2003 and on an analysis of relationships between business-cycle fluctuations in the amounts of private deposits, private and public loans and budget expenditures and receipts.

A statistically significant impact of cyclical changes in budget expenditures on lending to the public sector has been observed. On the other hand, no impact of business-cycle changes in the amount of public loans on fluctuations in the amounts of private deposits or loans has been confirmed. Moreover, private sector deposits and loans exhibit significantly weaker influence of business cycle factors than budget receipts and expenditures or central government and local government loans. Thus the analysis did not provide grounds for claiming that private expenditures are crowded out by public ones through the deposit and credit markets.