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Approaching Modern Monetary Theory with a Taylor Rule

Author

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  • Ryan S. Mattson

    (Department of Accounting, Economics and Finance, Paul and Virginia Engler College of Business, West Texas A&M University, Canyon, TX 79016, USA)

  • Rex Pjesky

    (Department of Accounting, Economics and Finance, Paul and Virginia Engler College of Business, West Texas A&M University, Canyon, TX 79016, USA)

Abstract

Considering the goals of Modern Monetary Theorists, this article examines inflation stabilization and employment maximization through a Taylor Rule for fiscal policy, similar to John Taylor’s foundational examination of the behavior of the Federal Reserve. If it is the role of the federal government to aid in the maintenance of the dual mandate of the Federal Reserve, then their behavior should follow a similar policy of setting an intermediate target of deficits relative to the maximum employment (the “Federal Job Guarantee”) and the inflation target. The paper will compare the historical data with the rule. When the predictions of the Deficit Rule are compared to historical data from 1965, we find that fiscal policy aligns with what the Deficit Rule predicts with two exceptions: the stagflation of the 1970s and the current increases in budget deficits.

Suggested Citation

  • Ryan S. Mattson & Rex Pjesky, 2019. "Approaching Modern Monetary Theory with a Taylor Rule," Economies, MDPI, vol. 7(4), pages 1-13, September.
    • Handle: RePEc:gam:jecomi:v:7:y:2019:i:4:p:97-:d:269088
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    Cited by:

    1. Mihaela Tofan & Mihaela Onofrei & Anca-Florentina Vatamanu, 2020. "Fiscal Responsibility Legal Framework—New Paradigm for Fiscal Discipline in the EU," Risks, MDPI, vol. 8(3), pages 1-18, July.
    2. Behailu Shiferaw Benti, 2021. "Was the Interest Rate Policy of the ECB too Loose? Insight from a Simple Taylor Rule," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 9(1), pages 19-28.

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    modern monetary theory; Taylor rule;

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