Tuesday, January 15, 2019

Peter Cooper — One of the Fundamental Differences Between Modern Monetary Theory and New Keynesian Economics


Independent economist Peter Cooper addresses the "we-knew-it-all-along" claim and shows, not really.

heteconomist
One of the Fundamental Differences Between Modern Monetary Theory and New Keynesian Economics
Peter Cooper

2 comments:

Ralph Musgrave said...

Far as I can see, one of the main differences between New Keynsianism and MMT is the importance NK attaches to expectations. But are they right to attach importance to expectations?

Certainly there’s an extreme version of the expectation idea, i.e. Ricardian Equivalence which assumes everyone is omniscient and has totally accurate expectations. Stiglitz described RE as “sheer nonsense”. Quite right: the idea that every household and small firm pours over figures for the deficit, interest rates etc etc and tries to work out what will happen in the future is so unrealistic that the only people likely to believe in it are the academic economists who have little interest in reality.

It is far more likely that peoples’ expectations are very erratic and muddled. In those circumstances, the idea put by Keynes in the early 1930s, i.e. that simply having the state create and spend base money in a recession ought to work. And MMTers accept that idea, far as I’m aware.

Detroit Dan said...

New Keynesian Economics also assumes too much power for monetary policy -- i.e. tinkering with interest rates. It also assumes that sovereign budgets should be balanced in general, and must be in the long run. "Expectations" may be used to support such views, but a more important factor is lack of trust in governments. This becomes a self-fulfilling factor when the government is run by people who don't trust government.