Discussion paper Monetary Policy

DP17501 Modern Monetary Theory: the post-Crisis economy misunderstood?

We set out Modern Monetary Theory (MMT) as a full DSGE model, and test it by indirect inference on post Financial Crisis US data, alongside a standard New Keynesian, NK, model. The MMT model is rejected, while the NK model has a high probability. We then evaluate replacing the fiscal and monetary policies within the NK model by MMT policies, and find that they imply a material loss of welfare.

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Citation

Liu, C, P Minford and Z Ou (2022), ‘DP17501 Modern Monetary Theory: the post-Crisis economy misunderstood?‘, CEPR Discussion Paper No. 17501. CEPR Press, Paris & London. https://cepr.org/publications/dp17501