Debt to GDP Ratio from the Perspective of MMT

Yasuhito Tanaka

doi:10.5296/bms.v13i1.19353

Abstract

In this note we examine the debt to GDP ratio from the perspective of MMT (Modern Monetary Theory) by a simple macroeconomic model with savings by government bonds instead of money. Mainly we will show the following results. 1) In order to maintain full employment under economic growth, the budget deficit, including interest payments on government bonds, must be positive; and if the budget deficit is smaller than this value, there will be recession with involuntary unemployment. 2) Under full employment the debt to GDP ratio approaches to a finite value over time. 3) In the underemployment case the national income is determined by the budget deficit. 4) The excessive budget deficit causes inflation. 6) In order to recover full employment from recession we need budget deficit larger than that when full employment is maintained. 5) The budget deficit, including interest payments on government bonds, equals the increase of the savings of consumers between periods (generations); and this result holds whether we have full employment or not, whether we have inflation or not. Then, the ratio of the national debt to GDP in a period is smaller than one, and even if one period constitutes of several years, the debt to GDP ratio in a year is finite.

Highlights

Our several previous studies have examined Functional Finance Theory (Lerner (1943, 1944), Wray (2018)), and MMT (Modern Monetary Theory, Wray (2015), Mitchell, Wray and Watts (2019), Kelton (2020)
In this note we examine the debt to GDP ratio from the perspective of MMT (Modern Monetary Theory) by a simple macroeconomic model with savings by government bonds instead of money
We studied the problems caused by budget deficits from the perspective of functional fiscal theory and MMT, based on the microeconomic foundations of consumer and firm behavior: utility maximization for consumers under budget constraints and profit maximization for firms2

Summary

Introduction

Our several previous studies have examined Functional Finance Theory (Lerner (1943, 1944), Wray (2018)), and MMT (Modern Monetary Theory, Wray (2015), Mitchell, Wray and Watts (2019), Kelton (2020)). 2022, Vol 13, No 1 returns to scale technology with positive profits, and 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 of consumers, with or without unemployment insurance, and with or without consumption in childhood period before the younger (working) period In these models, we studied the problems caused by budget deficits from the perspective of functional fiscal theory and MMT, based on the microeconomic foundations of consumer and firm behavior: utility maximization for consumers under budget constraints and profit maximization for firms. 2. The real national income is determined by the budget deficit given the marginal propensity to consume, the savings carried over from the previous period and the fiscal spending. (Proposition 8) Note that the budget deficit is an independent variable, and the savings as well as income are dependent variables This result holds whether we have full employment or not, whether we have inflation or not. In Appendix we briefly consider a case where investment is a function of the interest rate

Economic Growth With Full Employment

Underemployment Case

Inflation by Excessive Budget Deficit

Recovery from recession

The Debt to GDP Ratio under Continued Inflation

Conclusion