Can Modern Monetary Theory fit the post‐Crisis US facts? Evidence from a full DSGE model

Modern Monetary Theory (MMT) claims that a monetarily sovereign government like the US is never confronted by a real budget constraint since it can always monetise any deficit by printing money; and this need not be inflationary since it can always drain excess money from circulation by taxing. MMT...

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Bibliographic Details
Published in:International journal of finance and economics 2024-02
Main Authors: Liu, Chunping, Minford, Patrick, Ou, Zhirong
Format: Article
Language:English
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Summary:Modern Monetary Theory (MMT) claims that a monetarily sovereign government like the US is never confronted by a real budget constraint since it can always monetise any deficit by printing money; and this need not be inflationary since it can always drain excess money from circulation by taxing. MMT economists claim that their theory is in line with the behaviour of the US data since the Financial Crisis, and argue that policy in the post‐COVID recovery period should continue to be guided by MMT principles. We set out the MMT policy rules within a full DSGE model and test this model version against the data by indirect inference, side by side with a standard New Keynesian rival version, to evaluate these claims. We find that the MMT model is rejected by the data, while the standard model is not; and that the MMT policy rules imply a material loss of welfare compared to the standard ones.
ISSN:1076-9307
1099-1158
DOI:10.1002/ijfe.2955