by So Olivier Blanchard gave the AEA presidential address at the Atlanta meetings earlier this year. If you missed it you can watch it here. The paper is also here. In all fairness, there is nothing new there. He notes the famous rule by Evsey Domar about sustainability of public debt, meaning that if the rate of interest on debt is lower than the rate of growth, debt-to-GDP ratios tend to be stable and you are in no danger in pursuing active fiscal policies.Note that functional finance is in many ways compatible with Old Neoclassical Synthesis Keynesianism, and it should not be a surprise that New Keynesians accept some of the same arguments. Certainly Domar was an Old Keynesian in that mold, and although he was more difficult to classify, Abba Lerner the founder of functional finance
Topics:
Matias Vernengo considers the following as important: Crowding out, Domar, Functional Finance, MMT, Monetization of debt, Mundell-Fleming
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Mike Norman writes Odd posts from Warren Mosler claiming “crowding out.”
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Steve Roth writes MMT and the Wealth of Nations, Revisited
Matias Vernengo writes On central bank independence, and Brazilian monetary policy
Note that functional finance is in many ways compatible with Old Neoclassical Synthesis Keynesianism, and it should not be a surprise that New Keynesians accept some of the same arguments. Certainly Domar was an Old Keynesian in that mold, and although he was more difficult to classify, Abba Lerner the founder of functional finance accepted many marginalist arguments.
Blanchard actually is quite conventional and argues that public debt has negative welfare effects and reduces growth (forget this, that the Industrial Revolution was done on a pile, a huge pile, of public debt). He is very clear that he's not in general in favor of more debt, but only under the current circumstances, in which the rate of growth would be above the risk free interest rate of government bonds (that he calls the safe rate) and the marginal efficiency of capital (which really means he thinks in terms of a natural rate, in Wicksellian fashion).
Yet, of course, pundits went crazy. A typical reaction is from Desmond Lachman, and ex-IMF economist (i.e. worked for Blanchard), and fellow at the American Enterprise Institute in the Wall-Street Journal. Two things, one he suggests that Blanchard is a defender of MMT, which is a stretch. MMT involves more than functional finance, like a notion of endogenous and chartal money, and a policy preoccupation with full employment, often embodied in an Employer of Last Resort (ELR) proposal (that's a non exhaustive list). The second issue is that his whole argument is that the rate of interest will go up soon (as a result, presumably of foreign bond holders; in his words: "It’s more likely that investors, particularly from overseas, will demand higher government bond yields to compensate for the elevated inflation or default risk they see from an ever-increasing public debt ratio"). In other words, the foreign crowding-out of the old Mundell-Fleming model.