EconoMonitor : Ed Dolan’s Econ Blog » Debt Sustainability, Growth, Interest Rates, and Inflation: Some Charts for Discussion and Some Inconvenient Truths for MMT

My Wag

Part of an ongoing economic discussion regarding Mondern Monetary Theory or MMT.

Enjoy…

EconoMonitor : Ed Dolan’s Econ Blog » Debt Sustainability, Growth, Interest Rates, and Inflation: Some Charts for Discussion and Some Inconvenient Truths for MMT.

In a series of posts[1] [2] [3] [4] [5] over the last couple of months, fellow Economonitor blogger L. Randall Wray and I have been exploring the conditions under which the government’s debt can be said to be sustainable. Wray writes from the point of view of Modern Monetary Theory (MMT), while I adopt a more eclectic and skeptical approach.

A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G. (We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.)

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