MMT, We Hardly Knew Ye

Was noticing that I hadn’t heard much about Modern Monetary Theory (MMT) in the news lately. Since Biden’s economic policies appear to be based on MMT, either willfully or by chance, I was wondering if the economists advising the White House were cooling off on the notion that they could print arbitrary amounts of money and control inflation via taxation.

Then I ran across this recent article by some fellows in the UK, where they built economic models for MMT and “New Keynesian” (NK) theories, and compared the predictions of both to the economy from 2008 to 2019. From their conclusion:

Modern Monetary Theory (MMT) portrays a world in which fiscal activism need not be constrained by the government budget, for which it has received much attention since the Financial Crisis while the space for monetary policy has largely contracted. Nevertheless, while MMT economists have failed to sell their Theory as well as its associated policy advice with evidence established by formal economic models, the wider group of mainstream economists have not been able to assess MMT in a formal manner, either—the fundamental barrier being that none has been able to embody MMT in a structural model in a testable form.

In this paper, we filled this gap by spelling out MMT as a full DSGE model, and tested its empirical validity and implications on economic stability and welfare, side by side with a standard New Keynesian (NK) model treated as the benchmark model. By testing both models against the post-Crisis data with indirect inference, we found the MMT model was rejected at the usual 5% significance level, while the NK model passed the test with a high probability. Thus, there is strong evidence against the MMT narrative of how fiscal and monetary policies have interacted and affected the US economy post-Crisis; by contrast, the NK model with a Taylor rule explains the data fairly well.

[Emphasis mine in the second paragraph. DSGE is Dynamic Stochastic General Equilibrium, and no, I don’t know that is either.]

To those of you who thought MMT sounded like a complete crock; yeah, it’s a complete crock.