by Summary:
Abstract An increasingly visible school of heterodox macroeconomics, Modern Monetary Theory (MMT), makes the case for functional finance – the view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits. Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference
Topics:
Mike Norman considers the following as important: conventional macroeconomics, economic policy, Economic Theory, Functional Finance, MMT
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Abstract An increasingly visible school of heterodox macroeconomics, Modern Monetary Theory (MMT), makes the case for functional finance – the view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits. Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference
Topics:
Mike Norman considers the following as important: conventional macroeconomics, economic policy, Economic Theory, Functional Finance, MMT
This could be interesting, too:
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Abstract
An increasingly visible school of heterodox macroeconomics, Modern Monetary Theory (MMT), makes the case for functional finance – the view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits. Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements – in particular what kinds of errors are most likely from policymakers.
Arjun Jayadev and J. W. Mason
August 22, 2018
John Jay College - CUNY
Department of Economics Working Paper 2018-8