Thursday, March 14, 2019

Dirk Ehnts — A simple macroeconomic model based on Modern Monetary Theory (and published in 2014 in a peer-reviewed journal

There is a lot of talk about how MMT would lack a “model”. Some commentators on Twitter even claim that MMT would have “no model” and that they just created one themselves. Others believe that stock-flow consistent (SFC) models are basically SFC models. All of that is not quite right!
I think that the only model that can really claim to be a “MMT model” is the one I published in a peer-reviewed journal in 2014. The article in the International Journal of Pluralism and Economics Education (IJPEE) was named “A simple macroeconomic model of a currency union with endogenous money and saving-investment imbalances” (link). With hindsight, it was not a good title, since there is nothing specific about “currency union” or (private!) “saving-investment imbalances” in the model. It is really a replacement of the IS/LM-model and nothing else. The working paper version is accessible freely and was written in 2012 (link). During that year, I was at the Hyman-Minsky summer school at the Levy Institute of Bard College, NY. I showed the model to Randy Wray and Scott Fullwiler and some other people and they all liked it. Given that my model has the sectoral balances at its core that did not surprise me.
Since the model has not gotten a lot of attention so far – I presented it at University of Cassino in Italy after being invited there to spend a week with SFC modeler Gennaro Zezza and in some other place – I would like to use this blog post to explain the model briefly. Of course, the IJPEE paper is the long version. (The working paper contains some minor flaws that had been fixed in the journal version.) For those who can’t wait to see it, you can download a spreadsheet file of the ISMY model here. It has all the equations and is solvable by toying around with it....
econoblog 101


Kaivey said...

My tablet stoped working so they sent a new one, which broke down within two days. So I'm out of action for a while, although I my use my PC later, if I get time when I get home.

Noah Way said...

cant with for Egmont to "prove" this false ...

Konrad said...


Why right wingers and neoliberal Democrats hate Alexandria Ocasio-Cortez...

From a Tweet on 13 March 2019...

Cost of the GOP Tax Scam for the rich: $1.8-2.3 Trillion

Cost of forgiving all student loans in America: $1.5 Trillion

Clearly where there’s a will, there’s a way.

When people say that there isn’t “enough” to do these things, what they mean is they don’t WANT to do them.

Konrad said...

Kaivey's tablet is in error.

∑(a + b)2 = a2 + 2ab + b2; a2 + b2 = ∞ f(x)=a_0+∑_(n=1)^∞(a_n cos⁡ nπx/L+b_n sin⁡nπx/L) (a+b)2 −2ab−b = 0

Hedgemount Karaoke Crabwank

AXEC / E.K-H said...


The public-debt and private-profit pushers
Comment on Lars Syll/Dirk Ehnts on ‘Public debt — a macroeconomic necessity’

Dirk Ehnts argues: “The problem stems from the fact that the affluent, which include successful entrepreneurs and capital owners, save relatively more than average or poor households … For this to work out, additional demand would have to be created … The implication of this is that there’s a macroeconomic requirement to run public deficits, founded on a demand gap that arises from households and firms wanting to set aside savings in the form of money … This demand gap cannot be closed but by an increase in government spending and hence debt.”

This is at best a half-truth.

The macroeconomic Profit Law is given by Q=Yd+(I−S)+(G−T)+(X−M). In order to focus on the interaction between the household sector and the government sector, it is here reduced to Q=−S+(G−T). Legend: Q macroeconomic profit, S household sector saving, G government expenditures, T taxes.

If the government’s budget is balanced, i.e. G=T, and if the households dissave, i.e. S≡Yw−C<0 Legend: Yw wage income, C consumption expenditures, then the business sector makes a profit, i.e. Q is positive. This is a sustainable situation for the business sector, however, since the household sector’s debt grows, all depends on how long this can go on which, in turn, depends on the institutional make-up of the banking sector.

If the government’s budget is balanced, i.e. G=T, and the households save, i.e. S≡Yw−C>0, then the business sector makes a loss, i.e. Q is negative. This is not a sustainable situation.

However, if the government’s budget deficit, i.e. (G−T)>0, is equal to the household sector’s saving, i.e. (G−T)=S, then macroeconomic profit Q is zero. This is the minimum condition for the market economy to function. If the government’s deficit is greater than household sector saving, then the business sector makes a profit. This is a sustainable situation for the business sector, however, since the government sector’s debt grows, all depends on how long this can go on. MMTers claim that, as a matter of principle, sovereign debt can grow indefinitely.#1

So, government deficit spending in excess of household sector saving, i.e. (G−T)>S, makes that overall profit is positive and this prevents the breakdown of the market economy. In other words, the so-called free market economy hangs on the life-support of the State. In still other words, fabulous financial wealth is the mirror image of fabulous public debt ($22 trillion).

It is correct to say that a minimum government deficit, i.e. (G−T)=S, is necessary in order to secure the very existence of the market economy. From a systemic standpoint, the historically evolved economic system has a serious construction flaw. And the claim of the free-market champions that the State should keep out of the economy is suicidal stupidity.

However, as far as the government deficit exceeds saving, i.e. (G−T)>S, this amounts to a free lunch for the Oligarchy. So, in the final analysis, the MMT policy of permanent deficit-spending/money-creation does NOT benefit WeThePeople but the Oligarchy.#2

The public-debt pusher Lars Syll/Dirk Ehnts either do not understand macroeconomics#3 or they are two of Wall Street’s many academic trolls.#4

Egmont Kakarot-Handtke

#1 Some nasty MMT surprises behind the time horizon

#2 MMT Progressives: stupid or corrupt or both?

#3 Keynesians ― terminally stupid or worse?

#4 MMT: The fusion of Wall Street and Academia