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.


  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.

    1. This might help: Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory - see

    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?

    3. The use of ISLM does not necessarily make you a neo-keynesian:

    4. Well, I disagree with that. Robinson extensively criticised the ISLM. She showed serious problems with the investment function. []

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

      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.

  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.

  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.