Monday, February 17, 2014

Palley on the limitations of MMT once again

Tom Palley's new paper on MMT titled "Modern money theory (MMT): the emperor still has no clothes" is out. From the abstract:
Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics.
 The full paper is here.

7 comments:

  1. "For the last seventy years the language of macroeconomics has been small scale simultaneous equation models with dynamic adjustment mechanisms attached to explore issues of stability. Proponents of MMT have a professional obligation to provide such a model to help understand and assess the logic and originality of their claims."

    Throw out Joan Robinson's work? Throw out Keynes' work? I don't know what to make of this.

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    1. This might help: Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory - see http://www.boeckler.de/pdf/p_imk_wp_109_2013

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    2. I read that ages ago. I don't care about the debate. I think Palley's criticisms are weak.

      What I want to know is: from what position is Palley arguing? He seems to write a lot about how great the ISLM curve is. Does this make him a neo-Keynesian or what?

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    3. The use of ISLM does not necessarily make you a neo-keynesian: http://nakedkeynesianism.blogspot.com/2013/12/islm-further-explanation-and-defense.html

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    4. Well, I disagree with that. Robinson extensively criticised the ISLM. She showed serious problems with the investment function. [http://fixingtheeconomists.wordpress.com/2013/11/13/2302/]

      But Palley also adopts the Phillips Curve. Taken together these are the hallmarks of neo-Keynesianism:

      http://en.wikipedia.org/wiki/Neo-Keynesian_economics#Neoclassical_synthesis

      Then there's the insistence on static modelling as a prerequisite for economics to be "taken seriously". This again does not line up with anything I've read that could be classified as Post-Keynesianism.

      Honestly, I see very little that is not neo-Keynesian in Palley's paper.

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  2. I'm asking this everywhere but I'm genuinely curious... The more I read the paper the more it seems like a neo-Keynesian paper. On all the key points Palley seems to fall on the neo-Keynesian side of the argument. On ISLM; on the status of modelling; on using an equilibrium framework and testing for stability; on the Phillips Curve... it's all neo-Keynesian.

    Can some people on here please clarify whether Palley is a Post-Keynesian or a neo-Keynesian economist? I'm genuinely confused.

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  3. While I generally disagree with Palley's piece, he is right that you should be able to express your theory as a system of equations. For functional finance, that's easy: Just replace the budget constraint with a fiscal policy rule setting the G-T based on inflation and/or unemployment, and the Taylor rule setting i at whatever value is necessary to stabilize the debt-GDP ratio or, if you prefer, at zero. If we can achieve output at potential and a constant debt ratio using orthodox policy, then we can also achieve them using this set of rules.

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