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Jonathan Leviin: John Bates Clark Medalist

Is "Modern Monetary Theory" Modern or Monetary or a Theory?

I think I am beginning to understand what had confused me: MMT is not M, or M, or T. Steve Randy Waldmann:

interfluidity » MMT stabilization policy — some comments & critiques: Enthusiasts sometimes present MMT in a manner that’s too complete and hermetically sealed. While some MMT theorizing is based on “double entry accounting” or “obvious, unarguable facts”, when MMT adherents offer non-trivial conclusions, they rely upon assumptions about human behavior that are in fact contestable...

But unless the proponents of a point of view admit that it is a set of guesses about the world that is potentially falsifiable, you don't have a theory--rather you have a tautology.

This will be a long post.... The summary points... are repeated below.... (1) The central macroeconomic policy instrument available to governments is regulating the flow of “net financial assets” to and from the private sector. The government creates private sector assets by issuing money or bonds in exchange for current goods or services, or else for nothing at all via simple transfers. Governments destroy private sector financial assets via taxation. MMT-ers tend to view financial asset swaps, whereunder the government issues money or debt to buy financial assets already held by the private sector (“conventional monetary policy”) as second order and less effective, although they might acknowledge some impact.

Issuing money in exchange for goods or services is called "spending". Issuing bonds in exchange for goods or services is called "borrowing." Destroying private-sector assets via taxation is called "taxing." The government's spending, borrowing, and taxing together make up not its monetary policy but its fiscal policy.

If people want to talk about spending, borrowing, and taxing, I cannot object unless they call themselves "Modern Monetary Theorists." That seems to me to be the equivalent of somebody making the claim:

The phrase 'neige est blanche' is true if and only if penguins are orange.

Either it is false, or else people are not using words to mean what the words mean.

If MMTites believe as Steve Randy Waldmann claims they do, then they seem to me to be Hansenites (not Hicksians!) or Wicksellians, not monetary theorists in any Fisher-Friedman tradition. And it doesn't seem to me to be "modern" either. It seems to be what my notes from Tom Sargent's 1981 class call the "fiscal theory of the price level"...

Nick Rowe has an alternative interpretation:

Worthwhile Canadian Initiative: Reverse-engineering the MMT model: The IS curve is vertical. The IS is assumed vertical because the rate of interest is assumed to have no effect on either desired savings or desired investment. There is no natural rate of interest in the MMT version.... If the IS curve lies either to the right or to the left of full-employment output, there exists no interest rate such that desired savings equals desired investment at full employment.... If, by sheer fluke (or by skillful fiscal policy) the IS curve is exactly at full employment, any rate of interest will make desired savings equal desired investment at full employment.... Monetary policy has no effect on AD. Fiscal policy can be used, and must be used, because this model, with its vertical AD curve, has no inherent tendency towards "full employment" output. The price level is indeterminate, unless active fiscal policy makes it determinate.

Since monetary policy has no role to play in determining AD, the central bank can set any interest rate it feels like setting. Indeed, it might as well set a nominal interest rate near zero.... The rate of interest plays no allocative role in savings and investment. It does not coordinate intertemporal consumption and production plans of households and firms. It merely re-distributes wealth between borrowers and lenders.

In a standard model, the government has a long run budget constraint.... If the nominal/real rate of interest is less than the growth rate of nominal/real GDP, the government can run a stable Ponzi scheme. It can borrow, then borrow again to pay the interest, and the debt/GDP ratio will still fall over time, because the debt is growing at the rate of interest, which is lower than the growth rate of GDP. If the central bank can set any interest rate it likes, it might as well set a rate of interest below the growth rate of GDP. So the government debt becomes a stable Ponzi scheme, and there is no long run government budget constraint in the normal sense. The only constraint on fiscal policy is that if the government runs too big a deficit and/or allows the debt to grow too large this would cause the IS to shift to the right of full employment output, and so causes accelerating inflation....

MMTers have a liquidity preference (LM) theory of the rate of interest, and a loanable funds (IS) theory of the level of income.