Abstract
In recent years, a school of economics called MMT (Modern Monetary Theory) has been attracting attention, but it has not been analyzed theoretically or mathematically. This study aims to provide a theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility functions and budget constraint, profit maximization of firms in monopolistic competition, and equilibrium of supply and demand of goods. Using a simple static model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. In order to avoid further inflation, it is necessary to maintain a certain level of budget deficit; 3) A shortfall in the budget deficit leads to recession and involuntary unemployment. To recover from this, a budget deficit that exceeds the level necessary to maintain full employment is required. However, since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be.
Highlights
The outstanding amount of government bonds in Japan is over 1000 trillion yen, which is said to be in a critical situation
This study aims to provide a theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility functions and budget constraint, profit maximization of firms in monopolistic competition, and equilibrium of supply and demand of goods
Using a simple static model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment
Summary
The outstanding amount of government bonds in Japan is over 1000 trillion yen, which is said to be in a critical situation. We try to argue positively for the idea of the effect of fiscal policy, which is the backbone of functional finance theory and MMT's argument, using a simple mathematical model, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by utility function and budget constraint, profit maximization of firms in monopolistic competition, and equilibrium of supply and demand of goods. 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. Since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be. The size of the budget deficit should be considered from the perspective of adjusting and managing aggregate demand
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