Replacing the Budget Constraint with an Inflation Constraint


New Economic Perspectives has the article Replacing the Budget Constraint with an Inflation Constraint by Scott Fullwiler. This is another example of what a terrific job that Fullwiler does to dispel the misconceptions many people have about MMT (Modern Money Theory).  Below are some excerpts that give you just a hint of what you might learn if you read the article at the above link.  Let me further assure you that this article is not nearly as technical as was the Fullwiler discussion mentioned in my previous post Scott Fullwiler: Paul Krugman—The Conscience of a Neo-Liberal?.

As argued bazillions of times, the real point MMT is making is that the government’s budget constraint is the wrong constraint—the correct constraint is whether or not a particular budget position will raise inflation beyond an official target rate (say, 2%, which seems to be the choice of most central bankers).

Let me explain to Mr. Worstall and others how this could work rather easily— …
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We could add quite a bit of detail here if we want, but I’ll just say a few more things. First, it’s quite clear that economists don’t have much expertise modeling how to use the government’s budget stance to manage the macroeconomy via a functional finance rule—but this is largely because they have come to view monetary policy as the main macroeconomic policy tool, not because it’s not possible.
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In sum, let’s stop pretending that replacing a budget constraint with an inflation constraint is so hard. It involves a change in perspective, nothing more and nothing less. It doesn’t give license to policy makers to do whatever they want.

 

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