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Money, Fiscal Policy, and Interest Rates: A Critique of Modern Monetary Theory

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  • Thomas I. Palley

Abstract

This paper examines modern monetary theory (MMT). MMT is a restatement of established Keynesian monetary macroeconomics and so there is nothing new warranting a separate nomenclature. MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring dilemmas posed by the Phillips curve, maintaining real and financial sector stability, and an open economy. Its policy recommendations take little account of political economy difficulties, while its interest rate policy recommendation would likely generate instability. On the plus side, MMT's advocacy of expansionary fiscal policy is useful at a time when too many policymakers are being drawn toward mistaken fiscal austerity.

Suggested Citation

  • Thomas I. Palley, 2015. "Money, Fiscal Policy, and Interest Rates: A Critique of Modern Monetary Theory," Review of Political Economy, Taylor & Francis Journals, vol. 27(1), pages 1-23, January.
  • Handle: RePEc:taf:revpoe:v:27:y:2015:i:1:p:1-23
    DOI: 10.1080/09538259.2014.957466
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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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