Comparative economic policy Unit3

Quantitative theory of money

MV = PQ

M=money supply

V= velocity (constant)

P= price level

Q= output (constant)

Keynes quantitative theory of money

Classically: V (velocity) and Q (output) are constant, so increasing M (money) only increases P (prices) → i.e., causes inflation.

Keynes says: V and Q are not constant.

Keynesian view of monetary policy

1) Reject the classical quantity theory of money

2) Monetary policy affects the real economy, not just prices

3) Money causes inflation only at full employment

Old monetarism view of monetary policy

1) should not target real variables

2) Should not serve fiscal policy

3) Most important goal should be price stability

4) Should provide confidence and stability

5) use gold standard or exchange rate

6) Only affect nominal variables (money, prices, inflation, exchange rates)

Post-Keynesian view of monetary policy

1) money supply is endogenous

2) Credit demand is the real engine

3)Investment determines savings

4) Interest rates are set directly

5) No automatic link between foreign reserves and money supply

MMT builds on three key ideas

1) Charlist theory of money

2) Functional finance

3) Works in countries with monetary sovereignty

According to MMT unemployment is

a monetary phenomenon caused by too little public spending or too high interest rates

MMT: Inflation only happens if

spending exceeds the real capacity of the economy

MMT: debt is not dangerous like mainstream economists claim it is

just a record of money already spent

MMT: Purpose of the taxes is not to raise money,

but control inflation and demand

MMT pros

1) Questions traditional rules

2) Gives economic policy(FO) a stronger and more affective role

3) Highlights full employment and resource use

4) focus on reallocating resources

5) Reduces power of the fiscal system

MMT Cons

1) Not always clear which countries have monetary sovereignty

2) Not full monetary policy

3) risk of inflation etc if poor allocation or too high spending

4) See taxes only as a way to control demand

5) underestimates external constraints and ignores global realities