Working Paper: CEPR ID: DP17501
Authors: Chunping Liu; Patrick Minford; Zhirong Ou
Abstract: We set out Modern Monetary Theory (MMT) as a full DSGE model, and test it by indirect inference on post Financial Crisis US data, alongside a standard New Keynesian, NK, model. The MMT model is rejected, while the NK model has a high probability. We then evaluate replacing the fiscal and monetary policies within the NK model by MMT policies, and find that they imply a material loss of welfare.
Keywords: Modern Monetary Theory; DSGE Model; Fiscal Activism; Wald Test; Indirect Inference
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MMT's portrayal of monetary policy (E52) | substantial loss of welfare (H53) |
| increased output volatility under MMT (E39) | substantial loss of welfare (H53) |
| MMT leads to increased output volatility (E19) | MMT leads to substantial loss of welfare (D69) |
| MMT (E19) | increased output volatility (E32) |
| NK model provides greater stability in output and welfare (D69) | NK model explains economic outcomes better than MMT (E12) |
| MMT fails to provide a valid explanation of US monetary policy (E49) | adopting MMT would lead to detrimental economic consequences (E19) |