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Macroeconomics vs Modern Money Theory: Some unpleasant Keynesian arithmetic

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  • Thomas Palley

    (Economics for Democratic and Open Societies (US))

Abstract

The last decade has witnessed a significant revival of belief in the efficacy of fiscal policy and mainstream economics is now reverting to the standard positions of mid-1970s Keynesianism. On the coattails of that revival, increased attention is being given to the doctrine of Modern Money Theory (MMT) which makes exaggerated claims about the economic costs and capability of money-financed fiscal policy. MMT proponents are now asserting society can enjoy a range of large government spending programs for free via money financed deficits, which has made it very popular with progressive policy advocates. This paper examines MMT’s assertion and rejects the claim that the US can enjoy a massive permanent free program spree that does not cause inflation. As has long been known by Keynesians, in a static economy money financed deficits can be used to finance programs when the economy is away from the full employment - inflation boundary. However, that window will be temporary to the extent that those deficits drive the economy to full employment. Since the programs are permanent they have to be paid for with taxes or they will generate inflation. That is the economic logic behind the unpleasant Keynesian arithmetic.

Suggested Citation

  • Thomas Palley, 2019. "Macroeconomics vs Modern Money Theory: Some unpleasant Keynesian arithmetic," Working Papers PKWP1910, Post Keynesian Economics Society (PKES).
    • Handle: RePEc:pke:wpaper:pkwp1910
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    File URL: https://www.postkeynesian.net/downloads/working-papers/PKWP1910.pdf
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    References listed on IDEAS

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    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    2. 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.
    3. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    4. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
    5. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
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    Cited by:

    1. Guillaume l'Oeillet, 2022. "Modern Monetary Theory: wrong ideas, real limits and blind spots. An overview of the critics [La Théorie Monétaire Moderne : idées fausses, vraies limites et angles morts. Un tour d’horizon des cri," Post-Print hal-03854814, HAL.
    2. Cristea Loredana Andreea & Voda Alina Daniela & Ungureanu Dragos Mihai, 2021. "Fiscal Policy And The Conceptual Mechanism Of Fiscal System," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 80-86, April.
    3. Robert S. Kravchuk, 2020. "Post‐Keynesian Public Budgeting & Finance: Assessing Contributions From Modern Monetary Theory," Public Budgeting & Finance, Wiley Blackwell, vol. 40(3), pages 95-123, September.
    4. Lucia Mandongwe & Stanley Murairwa & Phamela Dube, 2022. "A Theoretical Assessment of the Operational Budgets in Hyperinflation Countries, Lessons from Boarding Schools in Zimbabwe: Effects and Survival Strategies," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(6), pages 669-677, June.
    5. Françoise Drumetz & Christian Pfister, 2021. "The Meaning of MMT," Working papers 833, Banque de France.

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    More about this item

    Keywords

    Fiscal policy; budget deficits; money finance;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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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