Thread by @AusMMT

He has BLOCKED me but @profholden once asked for a “formal theory” of MMT. Well here it is.

https://twitter.com/SamHLevey/status/1433791554896998402

The model examines two claims of Modern Monetary Theory: 1) The government determines the price level through the prices it pays when it spends. 2) Deficient demand results when the government does not supply enough currency to meet private demand. #MMT 🏛️💸

The model builds a "monopoly money" framework where the government sets the "price of money" through its spending. While private actors recirculate government currency, they depend on the government as the monopoly supplier. #MonopolyMoney 💰📈

In equilibrium, the private "price of money" converges to the government's price. This supports the claim that government spending determines the overall price level. #PriceLevel #Equilibrium ⚖️

However, when the government aims to purchase a fixed quantity of goods while levying proportional taxes, it essentially "fixes" its fiscal position in real terms. #FiscalPolicy #Taxes 📊🔧

Yet a changing price level creates a mismatch that results in either hyperinflation or deflation, depending on initial conditions. #Inflation 📈 #Deflation 📉

Even if falling prices temporarily restore full employment, they cannot alter the government's underlying fiscal stance. Loose or tight policies will continue to shift aggregate demand over time. #Employment #AggregateDemand 👩‍💼📊

In summary, the model demonstrates how the government's role as currency issuer gives it power over the price level. #MMTModel 🌐💪

However, fixing purchases while levying proportional taxes creates an unstable fiscal situation where price changes cannot resolve the imbalance, resulting in inflation or deflation. #FiscalInstability ⚠️🔄

So there you have it Professor Richard Holden, what we presume you requested the mathematisation of MMT, as other than that it already provides clearly defined assumptions & logically consistent arguments, so we presume the “formal theory” request is #MMT mathematically defined

A quick follow up: He also asked for MMT’s theory on inflation. I’d like to point him towards Kalecki’s Theory of Economic Dynamics: An Essay on Cyclical and Long-Run Changes in the Capitalist Economy 1954; includes role of distributional conflicts in determining inflation rates.