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Debt to GDP Ratio and inflation from the perspective of Functional Finance Theory and MMT

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  • Yasuhito Tanaka

Abstract

This paper will examine the relationship between budget deficit, inflation rate and debt to GDP ratio from the perspective of Functional Finance Theory and MMT (Modern Monetary Theory). Using a basic macroeconomic model in which the interest rate of government bonds is endogenously determined, with overlapping generations model in mind, mainly, we show the following results.1. If the proportion of the savings consumed is smaller than one, the larger the budget deficit is, the larger the inflation rate is.2. If the proportion of the savings consumed is smaller than one, the larger the inflation rate is, the smaller the debt to GDP ratio is. Therefore, excessive budget deficits cause inflation, which results in a smaller debt to GDP ratio. A large budget deficit is not associated with a high debt to GDP ratio.3. The larger the budget deficit is, the weaker the condition on the proportion of savings that is consumed in order for the debt to GDP ratio not to diverge is.

Suggested Citation

  • Yasuhito Tanaka, 2022. "Debt to GDP Ratio and inflation from the perspective of Functional Finance Theory and MMT," Business and Economic Research, Macrothink Institute, vol. 12(2), pages 84-98, December.
    • Handle: RePEc:mth:ber888:v:12:y:2022:i:2:p:84-98
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    References listed on IDEAS

    as
    1. Masayuki Otaki, 2015. "Price Theory in a Monetary Economy," Advances in Japanese Business and Economics, in: Keynesian Economics and Price Theory, edition 127, chapter 2, pages 15-41, Springer.
    2. Yasuhito Tanaka, 2021. "An Elementary Mathematical Model for MMT (Modern Monetary Theory)," Research in Applied Economics, Macrothink Institute, vol. 13(3), pages 1-20, September.
    3. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
    4. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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