Daily Archives: January 12, 2018


Modern monetary theory and inflation – Part 2

Bill Mitchell – billy blog: Modern Monetary Theory … macroeconomic reality has the article Modern monetary theory and inflation – Part 2.

Raw material shocks can also trigger of a cost-push inflation. They can be imported or domestically-sourced. I will devote a special blog to imported raw material shocks in the future.

But the essence is that an imported resource price shock amounts to a loss of real income for the nation in question. This can have significant distributional implications (as the OPEC oil price shocks in the 1970s had). How the government handles such a shock is critical.

The dynamic is that the imported resources reduces the real income that is available for distribution domestically. Something has to give. The loss has to be shared or borne by one of the claimants or another. If the workers resist the lower real wages or if bosses do not accept that some squeeze on their profit margin is inevitable then a wage-price/price-wage spiral can emerge.

I am glad to see an MMT person address the issue of cost-push inflation as we experienced with oil in 1974. However, I find this article’s explanation a good deal weaker than the part 1 explanation of demand-pull inflation. After wading through the article, the only prescription that I can find is the following:

The preferred approach is to use employment buffer stocks in conjunction with fiscal policy adjustments to allow the available real income to be rendered compatible with the existing claims.

The way I interpret this is that the government puts the brakes on the economy to increase private sector unemployment, but the government Job Guarantee takes up the slack in employment. With the JG, there is no unemployment, but the average salary is lowered. I have always felt that the way Ronald Reagan finally got inflation under control was to put the brakes on the economy to increase private sector unemployment. In Reagan’s case there was no government JG to ease the pain.


Modern monetary theory and inflation – Part 1

Bill Mitchell – billy blog: Modern Monetary Theory … macroeconomic reality has the article Modern monetary theory and inflation – Part 1. Here is the introduction to the article.

It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element. That is what this blog is about.

I have never labored under the misconception that MMT was uninterested in controlling inflation. This article fully addresses, for those who haven’t seen it, the way MMT would control inflation under some circumstances. I am going to follow the link in the article to part 2 that addresses what to do about supply shocks as we experienced in 1974. I have been concerned that I have not seen anything written or talked about how MMT addresses this issue. I am glad to see that this missing component may just have been my lack of reading, not the lack of the issue being addressed.

You will see the term NAIRU in the article. Here is the explanation. Non-Accelerating Inflation Rate Of Unemployment – NAIRU