Abstract
Recently, a school of thought called Modern Monetary Theory (MMT) has been attracting attention, but it has not received much theoretical or mathematical analysis. In this paper, we examine the theoretical validity of the MMT argument using an overlapping generations (OLG) model that includes economic growth due to population growth, and give a generally positive evaluation of MMT. The basic idea is that a certain level of continuous budget deficit is necessary to maintain full employment when the economy is growing, that inflation occurs when the budget deficit exceeds that level, that a recession occurs when the budget deficit falls below that level, and involuntary unemployment occurs. In order to recover from a recession, a budget deficit in excess of that level is required, and that deficit need not be covered by a future budget surplus. The same can be said for growth resulting from technological progress.
Highlights
The basic idea is that a certain level of continuous budget deficit is necessary to maintain full employment when the economy is growing, that inflation occurs when the budget deficit exceeds that level, that a recession occurs when the budget deficit falls below that level, and involuntary unemployment occurs
Using a simple overlapping generations (OLG) model in which goods are produced solely by labor in a monopolistically competitive industry, this paper shows that maintaining full employment at constant prices in a growing economy with a growing population requires running a continuous budget deficit
2022, Vol 10, No 1 In Appendix B, using a three generations OLG model we briefly consider the case where there is a pay-as-you-go pension and consumption in childhood period, and show that in order to maintain full employment under economic growth, a budget deficit is necessary if the difference between savings excluding pensions and the debt from childhood consumption is positive, and that an excessive budget deficit leads to inflation
Summary
Using a simple overlapping generations (OLG) model in which goods are produced solely by labor in a monopolistically competitive industry, this paper shows that maintaining full employment at constant prices in a growing economy with a growing population requires running a continuous budget deficit. The need for budget deficits in a growing economy is thought to be due to the fact that older generations have lower total incomes than younger generations and have less total savings available for consumption This budget deficit is not a debt and should not be repaid or redeemed. In Appendix B, using a three generations OLG model we briefly consider the case where there is a pay-as-you-go pension and consumption in childhood period, and show that in order to maintain full employment under economic growth, a budget deficit is necessary if the difference between savings excluding pensions and the debt from childhood consumption is positive, and that an excessive budget deficit leads to inflation. We assume that labor productivity is affected by the amount of employment but not by population growth itself in the case of increasing or decreasing returns to scale, but we briefly discuss the case where productivity changes at a rate greater than or less than the rate of population growth due to increasing or decreasing returns to scale in the last section
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