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Debt and Deficits—A Modern Monetary Theory Perspective

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  • William F. Mitchell

Abstract

COVID‐19 has triggered the most severe economic crisis since the 1930s. The resulting policy shift is diametric to what mainstream macroeconomists have been advocating for decades. We argue that their framework underestimates the fiscal space available to governments and cannot provide an understanding of the consequences of these policy extremes. We introduce modern monetary theory (MMT), which disabuses us of the claims that deficits and debt are to be avoided. MMT defines fiscal space in functional terms, in relation to available real resources that can be brought back into productive use, rather than focusing on irrelevant questions of government insolvency.

Suggested Citation

  • William F. Mitchell, 2020. "Debt and Deficits—A Modern Monetary Theory Perspective," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 566-576, December.
    • Handle: RePEc:bla:ausecr:v:53:y:2020:i:4:p:566-576
    DOI: 10.1111/1467-8462.12400
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    2. Ian M. McDonald, 2020. "Macroeconomic Policy to Aid Recovery after Social Distancing for COVID‐19," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(3), pages 415-428, September.
    3. Simone Giansante & Mahmoud Fatouh & Steven Ongena, 2019. "Does Quantitative Easing Boost Bank Lending to the Real Economy or Cause Other Bank Asset Reallocation? The Case of the UK," Swiss Finance Institute Research Paper Series 19-72, Swiss Finance Institute.
    4. Doi, Takero & Hoshi, Takeo & Okimoto, Tatsuyoshi, 2011. "Japanese government debt and sustainability of fiscal policy," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 414-433.
    5. repec:rnp:ecopol:09111 is not listed on IDEAS
    6. William Mitchell & Joan Muysken, 2008. "Full Employment Abandoned," Books, Edward Elgar Publishing, number 1188.
    7. Marc Lavoie, 1984. "The Endogenous Flow of Credit and the Post Keynesian Theory of Money," Journal of Economic Issues, Taylor & Francis Journals, vol. 18(3), pages 771-797, September.
    8. Franco Modigliani & Lucas Papademos, 1975. "Targets for Monetary Policy in the Coming Year," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 141-166.
    9. William F. Mitchell, 1998. "The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment," Journal of Economic Issues, Taylor & Francis Journals, vol. 32(2), pages 547-555, June.
    10. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
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    Cited by:

    1. Osband, Kent & Filoso, Valerio & Capasso, Salvatore, 2024. "The limits of limitless debt," Journal of Macroeconomics, Elsevier, vol. 79(C).

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