The NYT had a brief discussion of Modern Monetary Theory (MMT) today in the context of a profile of Warren Mosler, one of its major proponents. The profile includes a dismissive comment from Mark Thoma, a professor at the University of Oregon and the creator of the blog, The Economist's View:
"They deny the fact that the government use of real resources can drive the real interest rate up ... I think it’s just nuts."
This description is not exactly right. MMT advocates would say that the Fed can keep real interest rates from rising by targeting the interest rate, printing whatever amount of money is needed to keep the interest rate (even a long-term interest rate) at the targeted level. In a context of excess demand, this would quickly lead to a serious problem with inflation.
The MMT remedy for inflation would be to increase taxes and thereby reduce demand. If this is done successfully then the government's demand for resources is offset by reduced private sector demand. In that situation there need not be any upward pressure on interest rates.
The main difference in this respect between MMT and more conventional Keynesians is that the latter would rely on both interest rates and taxes to limit demand and prevent inflation. Proponents of MMT would rely exclusively on taxes.
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