Fiscal Policy Approaches: An Inquiring Look From The Modern Monetary Theory

Abstract

An analytical framework of fiscal policy called Modern Monetary Theory (MMT) has been popularized in recent years. Its coming into play has not been free of controversy because many of its elements enter into a certain contradiction—when they are not directly incompatible—with many principles solidly established in orthodox—and even heterodox—literature. This has led many authors to consider that the MMT is not an academic contribution, but a kind of economic precepts that have no basis in economic theory, which has led to harsh criticism and disqualification, some by renowned economists such as Paul Krugman, Kenneth Rogoff, or Lawrence Summers. However, the particular theoretical approaches of the MMT could be precisely useful to appease—or at least better understand– some controversies in the fiscal policy literature at the empirical level. This work is intended to shed light on this issue.

Keywords:

• fiscal policy
• Modern Monetary Theory
• economic approaches
• literature review
• survey

JEL Classification Codes::

• E62
• E63
• E50
• E43

Notes

1 A concept first introduced in 1930 by Richard F. Kahn in an unpublished article that was briefly developed a year later in an article in Economic Journal (Kahn 1931).

2 This distinction had already been made clear by Milton Friedman (1957) and Modigliani and Brumberg (1954), among others.

3 Among those responsible for reviving this idea are Martin Bailey (1971), Robert Barro (1974) and Levis Kochin (1974).

4 Empirical evidence of this type of non-Keynesian effects is provided in Martin Feldstein (1982), Lawrence Christiano and Martin Eichenbaum (1992), S. Rao Aiyagari, Lawrence Christiano, and Martin Eichenbaum (1992) and Baxter and King (1993).

5 There are exceptions such as Juha Kilponen et al. (2015).

6 This mechanism of transmission is studied, among others, by Mattthew Lindquist and Roger Vilhelmsson (2006) and Ana Lamo, Javier Pérez, and Ludger Schuknecht (2012).

7 Of course, there were exceptions. For example, Kirchner, Cimadomo, and Hauptmeier (2010) noted that the effectiveness of fiscal policy had been decreasing during the last decades, while others such as Burriel et al. (2009) or Paredes, Pedregal, and Pérez (2009) indicated exactly the opposite.

8 Some analysts have not found evidence of this post-crisis rise in multipliers, such as Owyang, Ramey, and Zubairy (2013) or, in the case of public investment, Jong et al. (2017). Others consider that it is a short-term phenomenon without great importance (Górnicka et al. 2018).

9 Proposed by John B. Taylor (1993), it is a question of linking the official interest rate of money to the evolution of prices, gross domestic product and other economic variables.

10 This term emerged in the 80s of the twentieth century in the heat of the important growth that both the fiscal deficit and the current account deficit of the United States were experiencing (Miller and Russek 1989).

11 Term attributed to Summers (1988): Governments worry about the current account balance, so that imbalances usually entail fiscal policies aimed at maintaining equilibrium.

Additional information

Notes on contributors

Eduardo Garzón Espinosa

Eduardo Garzón Espinosa is in the Department of Economy and Public Finance at the Universidad Autónoma de Madrid, Madrid (Spain). Bibiana Medialdea García is in the Department of Applied Economics, Structure and History at the Universidad Complutense de Madrid, Pozuelo de Alarcón, Madrid (Spain). Esteban Cruz Hidalgo is in the Department of Economics, Area of Fundamentals of Economic Analysis at the Universidad de Extremadura Cáceres (Spain).

Bibiana Medialdea García

Bibiana Medialdea García is in the Department of Applied Economics, Structure and History at the Universidad Complutense de Madrid, Pozuelo de Alarcón, Madrid (Spain). Esteban Cruz Hidalgo is in the Department of Economics, Area of Fundamentals of Economic Analysis at the Universidad de Extremadura Cáceres (Spain).

Esteban Cruz Hidalgo

Esteban Cruz Hidalgo is in the Department of Economics, Area of Fundamentals of Economic Analysis at the Universidad de Extremadura Cáceres (Spain).