Modern Monetary Theory vs. New Keynesian

Attribute	Modern Monetary Theory	New Keynesian
View on government spending	Supports increased government spending to stimulate the economy	Believes in limited government intervention in the economy
View on inflation	Believes inflation is not a major concern as long as resources are not fully utilized	Believes inflation should be controlled through monetary policy
Role of central bank	Views central bank as a tool for managing interest rates and supporting government spending	Views central bank as the primary tool for controlling inflation and stabilizing the economy
View on fiscal policy	Emphasizes the importance of fiscal policy in managing the economy	Believes in the effectiveness of monetary policy over fiscal policy

Introduction

Modern Monetary Theory (MMT) and New Keynesian Economics are two economic theories that have gained popularity in recent years. While they both focus on macroeconomic issues, they have different approaches and assumptions. In this article, we will compare the attributes of MMT and New Keynesian Economics to understand their similarities and differences.

Overview of Modern Monetary Theory

Modern Monetary Theory is a macroeconomic theory that challenges traditional views on government spending and deficits. According to MMT, a government that issues its own currency can never run out of money and can always afford to pay its bills. This is because the government can simply create more money to finance its spending. MMT advocates for using fiscal policy, such as government spending and taxation, to achieve full employment and price stability.

Overview of New Keynesian Economics

New Keynesian Economics is a school of thought that builds upon the ideas of John Maynard Keynes. It emphasizes the role of aggregate demand in determining economic output and inflation. New Keynesian economists believe that prices and wages are sticky in the short run, leading to market inefficiencies and the possibility of involuntary unemployment. They argue that monetary policy, through central bank actions such as interest rate adjustments, can help stabilize the economy.

Key Attributes of Modern Monetary Theory

• Emphasis on government spending to achieve full employment
• Belief that deficits are not necessarily harmful if the government controls its own currency
• Advocacy for using fiscal policy over monetary policy to manage the economy
• Focus on the importance of public sector job guarantee programs
• View that inflation is the primary constraint on government spending

Key Attributes of New Keynesian Economics

• Focus on the role of aggregate demand in determining economic outcomes
• Belief in the effectiveness of monetary policy in stabilizing the economy
• Emphasis on market imperfections and the need for government intervention
• Recognition of the importance of expectations and forward-looking behavior
• View that price and wage rigidities can lead to short-run economic fluctuations

Comparison of Attributes

While Modern Monetary Theory and New Keynesian Economics have some overlapping goals, such as achieving full employment and price stability, they differ in their policy prescriptions and underlying assumptions. MMT places a greater emphasis on fiscal policy and government intervention in the economy, while New Keynesian Economics relies more on monetary policy and market mechanisms to achieve macroeconomic stability.

One key difference between the two theories is their views on deficits and government spending. MMT argues that deficits are not inherently bad and can be used to stimulate the economy, as long as inflation remains under control. In contrast, New Keynesian Economics is more cautious about deficits and believes that monetary policy should be the primary tool for managing the economy.

Another difference lies in their approaches to inflation. MMT sees inflation as the main constraint on government spending, while New Keynesian Economics focuses on the role of expectations and price rigidities in driving inflation. This difference in perspective leads to divergent policy recommendations, with MMT advocating for more aggressive government spending and New Keynesian Economics favoring a more cautious approach.

Conclusion

In conclusion, Modern Monetary Theory and New Keynesian Economics offer different perspectives on how to manage the economy and achieve macroeconomic stability. While they share some common goals, such as full employment and price stability, they diverge in their policy recommendations and assumptions about the functioning of the economy. Understanding the key attributes of MMT and New Keynesian Economics can help policymakers and economists evaluate the strengths and weaknesses of each theory and make informed decisions about economic policy.