Answer to Question #238463 in Macroeconomics for Jin

Question

Critically evaluate“ the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics”

Answer 1

Modern Money Theory (MMT) cannot work as an effective and sustainable macroeconomic policy program aimed at achieving and maintaining full employment output through persistent money-financed fiscal deficits in economies suffering from Keynesian unemployment, using an ISLM open-economy model based on Keynes' liquidity preference theory. 

In instances when the economy has very high policy credibility in the eyes of international financial markets or issues an international reserve currency, the negative effects of MMT policy can be avoided, and expansionary demand shocks can be successful. Without these characteristics, an open and internationally highly financial integrated economy that consistently implements MMT policy will either see its money stock grow unsustainable large or will be forced to set domestic interest rates at levels that are inconsistent with the policy goal of resource full employment, causing economic and financial insecurity instead. 

 

Modern Money Theory (MMT) explains why monetarily sovereign governments have a relatively free policy space that is unfettered by strict financial limitations, which is one of its primary contributions. MMT has also offered policy recommendations in the areas of financial stability, price stability, and full employment. As one might imagine, MMT has been panned by a number of authors. Views on the origins of money and the role of taxes in the adoption of government currency, fiscal policy, monetary policy, the relevance of MMT results for emerging countries, and the legitimacy of MMT policy suggestions are the five categories of MMT criticism. 

Answer:

There is nothing novel in MMT's approach to monetary macroeconomics that justifies its own name. Furthermore, MMT oversimplifies the difficulties of achieving non-inflationary full employment by neglecting the issues provided by Phillips curve analysis, the conflicts connected with real and financial sector stability, and the dilemmas confronting open economies. Its policy suggestions are also based on overly simple analysis that ignores political economy challenges, and its interest rate policy prescription is likely to cause instability. MMT's argument in favor of expansionary fiscal policy is important at this time of high unemployment, when too many policymakers are being lured into erroneous fiscal austerity.