Abstract
In this note we examine MMT (Modern Monetary Theory) arguments by a simple macroeconomic model without microeconomic foundation. Mainly we will show the following results. 1) In the underemployment case the national income is determined by the budget deficit. 2) In the full employment case we can define the budget deficit which is necessary and sufficient to achieve full employment. 3) The excessive budget deficit causes inflation. 4) We need budget deficit to achieve and maintain full employment under economic growth. 5) We can recover recession by the budget deficit which is larger than that when full employment is maintained. Also, we show that the budget deficit equals the increase in the savings between generations.
Highlights
IntroductionIn some previous studies (Note 1) we have examined the arguments for fiscal policy from the perspectives of Lerner’s (1943, 1944) Functional Finance Theory and MMT (Modern Monetary Theory, Wray (2015), Mitchell, Wray and Watts (2019), Kelton (2020) (Note 2) by several models, a static model, an overlapping generations model (according to Otaki, 2007, 2009, 2015) of perfect competition under constant returns to scale technology, an overlapping generations model of perfect competition under decreasing returns to scale technology with positive profits, an overlapping generations model of monopolistic competition (oligopoly with differentiated goods) with positive profits; with or without pay-as-you-go pensions for the older generation consumers, with or without unemployment insurances, with or without consumption in the childhood period before the younger (working) period
In this note we examine MMT (Modern Monetary Theory) arguments by a simple macroeconomic model without microeconomic foundation
In some previous studies (Note 1) we have examined the arguments for fiscal policy from the perspectives of Lerner’s (1943, 1944) Functional Finance Theory and MMT (Modern Monetary Theory, Wray (2015), Mitchell, Wray and Watts (2019), Kelton (2020) (Note 2) by several models, a static model, an overlapping generations model of perfect competition under constant returns to scale technology, an overlapping generations model of perfect competition under decreasing returns to scale technology with positive profits, an overlapping generations model of monopolistic competition with positive profits; with or without pay-as-you-go pensions for the older generation consumers, with or without unemployment insurances, with or without consumption in the childhood period before the younger period
Summary
In some previous studies (Note 1) we have examined the arguments for fiscal policy from the perspectives of Lerner’s (1943, 1944) Functional Finance Theory and MMT (Modern Monetary Theory, Wray (2015), Mitchell, Wray and Watts (2019), Kelton (2020) (Note 2) by several models, a static model, an overlapping generations model (according to Otaki, 2007, 2009, 2015) of perfect competition under constant returns to scale technology, an overlapping generations model of perfect competition under decreasing returns to scale technology with positive profits, an overlapping generations model of monopolistic competition (oligopoly with differentiated goods) with positive profits; with or without pay-as-you-go pensions for the older generation consumers, with or without unemployment insurances, with or without consumption in the childhood period before the younger (working) period. The real national income is determined by the budget deficit given the marginal propensity to consume, the constant part of consumption function and the fiscal spending. We can define the budget deficit which is necessary and sufficient to achieve full employment given the propensity to consume, the constant part of the consumption function and the tax (or the fiscal spending) by the full employment real national income and the investment. The central bank could just buy up all the government bonds This might have the effect of lowering interest rates, but it would not directly increase demand for goods and would not cause high rates of inflation, because people would not have more assets or income (unless the central bank bought them at a price above face value). Government bonds are money in the same broad sense as bank term deposits (“liquidity in the broad sense”), and the central bank's purchase of government bonds does not increase the money supply in that sense, so from the point of view of the quantity theory of money there is no inflation
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
