An Analysis of Differences and Commonalities between Modern Monetary Theory (MMT) and Mainstream Economics

Japanese edition: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3824025 ABSTRACTThis paper discusses the differences and commonalities in economic debates between Modern Monetary Theory (MMT) and (so-called) mainstream economics in three major categories: fiscal issues, financial system and monetary policy, and fiscal policy.Regarding fiscal issues, it is confirmed that MMT and mainstream economists can mutually agree on the absence of involuntary default in countries with the right to issue currency and floating exchange rate regimes. This paper then examines arguments on both sides for “redefinition of sovereign default”, criticizes each side, and suggests that the secular stagnation model might be useful as an alternative solution. We also examine the budget "surplus" argument and the asymmetry between government sector deficit and private sector deficit from both the MMT and mainstream perspectives.On the financial system and monetary policy, this paper points out the divergence between the both sides in terms of their understanding of money creation and endogenous money theory while it criticizes the mainstream argument for “consistency” mainly in terms of the uncertainty and instability of the relationship between the policy interest rate and aggregate demand. The author confirms that such criticism can be made not only from the MMT economists but also from recent debates within the mainstream economists.As for fiscal policy, this paper first discusses theories of crowding out and the Mandel-Fleming effect, and then argues that both effects are not certain (, i.e. may not hold) by examining IS-MP as a way to incorporate the MMT understanding of monetary and fiscal policies into the model. The author confirms that the discussion of the Ricardo-Barro effect (,also known as Ricardian equivalence), the FTPL, and government debt as a burden on future generations all depend on the assumption of fiscal sustainability. Finally, regarding fiscal rigidity, this paper points out that there is affinity between the concerns of the Kansas City approach of MMT, whose theories inherited from Minsky, and those mainstream economics and public finance