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Seismic Shifts in Economic Theory and Policy from the Bernanke Doctrine to Modern Money Theory

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  • Pavlina R. Tcherneva
  • Eric Tymoigne

Abstract

This paper evaluates the relationship between monetary and fiscal policy and the relative effectiveness of macroeconomic stabilization through the lens of Modern Money Theory (MMT). We articulate previously-neglected aspects of monetary sovereignty to offer a new interpretation of the Bernanke Doctrine that emerged in the wake of the 2008 Global Financial crisis. This Doctrine validated key MMT precepts and paved the way for fiscal policy activism in response to COVID19. The paper argues that fiscal and monetary policy coordination is not new or rare. It is an intrinsic feature of sovereign monetary regimes, allowing for more effective policy responses to financial crises or pandemics. To the extent that monetary policy is able to stabilize an unstable economy, it is largely due to its fiscal components. This recognition also calls for a rethinking of fiscal policy. Originally issued as EDI Working Paper No. 08, 2022.

Suggested Citation

  • Pavlina R. Tcherneva & Eric Tymoigne, 2024. "Seismic Shifts in Economic Theory and Policy from the Bernanke Doctrine to Modern Money Theory," Economics Working Paper Archive wp_1064, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_1064
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    References listed on IDEAS

    as
    1. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    2. 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.
    3. Eric Tymoigne, 2014. "Modern Money Theory, and Interrelations Between the Treasury and Central Bank: The Case of the United States," Journal of Economic Issues, Taylor & Francis Journals, vol. 48(3), pages 641-662.
    4. repec:rnp:ecopol:09111 is not listed on IDEAS
    5. Pavlina R. Tcherneva, 2011. "Bernanke's paradox: can he reconcile his position on the federal budget with his recent charge to prevent deflation?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(3), pages 411-434, April.
    6. Pavlina Tcherneva, 2014. "Reorienting fiscal policy: a bottom-up Approach," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(1), pages 43-66.
    7. Mathew Forstater & Warren Mosler, 2005. "The Natural Rate of Interest Is Zero," Journal of Economic Issues, Taylor & Francis Journals, vol. 39(2), pages 535-542, June.
    8. Lance Taylor & Christian R. Proaño & Laura de Carvalho & Nelson Barbosa, 2012. "Fiscal deficits, economic growth and government debt in the USA," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 36(1), pages 189-204.
    9. John C. Williams, 2016. "Monetary Policy in a Low R-star World," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    10. Eric Tymoigne, 2019. "Debunking the Public Debt and Deficit Rhetoric," Challenge, Taylor & Francis Journals, vol. 62(5), pages 281-298, September.
    11. Marc Lavoie, 2019. "A System with Zero Reserves and with Clearing Outside of the Central Bank: The Canadian Case," Review of Political Economy, Taylor & Francis Journals, vol. 31(2), pages 145-158, April.
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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