Lifted from Bill Mitchell's comment section, in which Bill sets straight a common misperception of MMT.
...MMT is very much a theoretical framework. It is built on a series of behavioral assumptions about various aspects of social and economic behaviour and adds consistent stock-flow accounting to those assumptions to form an explanatory framework of the way the system works and its responses to shifts in behaviour and parameters (for example, policy).
It is a misconception to think of it as only an accounting structure.
Bill Mitchell, billy blog
6 comments:
Thanks Tom for highlighting Bill's comment.
It would be interesting to see these behavioral assumptions built up into a model.
A good start would be to describe MMT's view on changes in interest rates. Listening to Neil Wilson, one gets the impression that MMT thinks of changes in interest rates as irrelevant (IS curve is vertical).
However, listening to Mosler, you get the impression that a rise in interest rates is expansionary, as it boosts aggregate demand (IS curve appears to be gently upward sloping(!)).
My own view, which I think is quite sensible and probably consistent with old school Keynesianism, is that the slope of the IS curve changes with the magnitude of the private sector's leverage (IS curve is downward sloping in normal circumstances but is vertical when people balance sheets act as a constraint).
I read both Wray's Understanding Modern Money and his more recent MMT book but unfortunately don't recall a clear statement relating to these behavioral assumptions.
Any ideas where I could find these?
circuit,
You might find this post from NEP helpful. You have to scroll down a bit to get to the relevant part where Wray quotes at length from a paper of his where he elaborates on his views about rates.
System Dynamics of Interest Rate effects on Aggregate Demand
geerussell, thanks for the links.
Interestingly, I found little in both the paper and the article that's inconsistent with the mainstream view relating to the interest rate elasticity of business investment. Conventional Keynesians would agree that there is little evidence changes in interest rates have much impact on business investment. That said, a conventional Keynesian would also say that changes in interest rates do have an impact on consumer spending (which is the main reason the IS curve is downward sloping).
Unfortunately, the impact of changes in interest rates on consumer spending is not considered in the paper, so the question remains an open one... Honestly, I would find it surprising if there are any studies that would deny this relationship.
As for the examination on the possible role of interest rates in boosting aggregate demand through debt service payments made by government on its outstanding debt (which is the main focus of the paper), I'd say it adds a valuable set of insights to the conventional view, though I think its conclusions only apply in limited circumstances such as when the outstanding debt is quite large, interest rates are high and private spending is not interest-rate elastic (the last of which I find unlikely for reasons mentioned earlier)
Even though higher interest rates add net $ to the private sector, is there any reliable info on what velocity is added, ie what portion of those added $ just get rolled over directly into more T-securities? With older fixed income investors, likely it would pass through a few hands before it goes to sleep in a T-bill or the like.
Interest rates are working via the property purchase channel in modern western economies IMV.
Nobody in business really gives a fig about the interest rate any more than they do the price of the electricity or reams of paper. They are just irritants you have to pay, onto which you tag your margin to work out roughly what you have to charge for your products.
Interest rates are there to persuade ordinary joes to borrow more money on their credit card or extend their mortgage. The principle is to hook them with debt so that they are trapped and have to hold their nose to the grindstone for the rest of their lives working for the capitalists because BANKRUPTCY!
The problem is that you are trying to drive a car by ignoring the steering wheel and instead strategically shifting your weight around to move the wheels. It works, roughly, but it's a very stupid way of doing things.
Property purchase is rentier territory and leaves you beholden to property developers and banks - giving them great political power of the government and management of the economy. Which as we have seen has lead to disaster.
Powerful fiscal auto-stabilisers have much finer control, get directly to the seat of the problem rapidly and have less political power issues.
Surely we want to design a production system that relies more upon intrinsic motivation to get things done rather than the baseball bat of debt peonage.
Neil, the automatic stabilizers interfere with the mating rituals of the Creative Destruction Unicorn and the Expansionary Austerity Unicorn. How can you be so heartless?
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