Deficits, Crowding Out and Inflation in Monetarily Sovereign Nations

Government deficits are often viewed negatively by mainstream economic theory. They are believed to lead to higher interest rates, inflation, and crowding out of private investment. This paper aims to evaluate the validity of these conventional beliefs about deficits. To do so, a Modern Monetary Theory and Keynesian theoretical framework have been used. These theories have then been analysed in the context of empirical data from the United States and Japan over the last three decades. I find that deficits have not directly led to higher interest rates, crowding out or inflation in these two nations. The findings emphasise the importance for monetarily sovereign governments to prioritise addressing socio-economic issues faced by citizens rather than being overly concerned about deficits on their own. The findings also indicate the need for a more pluralistic approach to macroeconomic policy that involves considering various schools of thought - such as Modern Monetary Theory - apart from mainstream economics, that may offer a more suitable framework for understanding fiscal policy choices and their respective outcomes.