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AD-AS Analysis from the Perspective of Functional Finance Theory and MMT

Author

Listed:
  • Tanaka Yasuhito

    (Doshisha University, Faculty of Economics, Japan.)

Abstract

Research background In the past few years, MMT (Modern Money Theory or Modern Monetary Theory) has been increasingly discussed in Japan as well as in the U.S. However, both in the U.S. and Japan, analysis using mathematics is lacking and analysis using IS-LM and AD-AS analysis methods in macroeconomics is almost non-existent. Purpose We present an AD-AS analysis from the perspective of Functional Finance Theory and MMT (Modern Monetary Theory). Research methodology Graphical analyses with some mathematical analyses. Mathematical analyses include graphic analysis using AD and AS curves and calculations to derive equations representing them based on models of consumer and firm behavior. Results Using an overlapping generations model under monopolistic competition we show the following results by calculations and graphical analyses. 1. The budget deficit (including interest payments on government bonds) equals an increase in the savings of consumers from period to period. This result means that the debt-GDP ratio would not diverge to infinity, but would remain at a finite value whether the interest rate of government bonds is larger or smaller than the growth rate. 2. We need a budget deficit (including interest payments) to maintain full employment without inflation under economic growth. However, if the interest rate of government bonds is larger than the growth rate, we need a budget surplus (excluding interest payments) to maintain full employment without inflation. 3. A return to full employment from a recession can be achieved by implementing the appropriate fiscal policies through increased government spending or tax cuts. 4. Excessive government expenditure or an insufficient tax under full employment induces inflation. Novelty This is probably the first AD-AS analysis done from the standpoint of Functional Finance Theory and MMT.

Suggested Citation

  • Tanaka Yasuhito, 2023. "AD-AS Analysis from the Perspective of Functional Finance Theory and MMT," Folia Oeconomica Stetinensia, Sciendo, vol. 23(1), pages 263-283, June.
    • Handle: RePEc:vrs:foeste:v:23:y:2023:i:1:p:263-283:n:2
    DOI: 10.2478/foli-2023-0014
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    References listed on IDEAS

    as
    1. 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.
    2. Tanaka, Yasuhito, 2022. "Budget deficit in a growing monetary economy: ver. 2," MPRA Paper 115631, University Library of Munich, Germany.
    3. Yasuhito Tanaka, 2021. "Very Simple Mathematical Model of MMT (Modern Monetary Theory)," Business and Economic Research, Macrothink Institute, vol. 11(3), pages 78-87, December.
    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

    Keywords

    AD curve; AS curve; Functional Finance Theory; MMT (Modern Monetary Theory); budget deficit;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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