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Growth by technical progress and fiscal policy for full-employment: A theoretical foundation for MMT

Tanaka, Yasuhito (2021): Growth by technical progress and fiscal policy for full-employment: A theoretical foundation for MMT.

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We study the fiscal policy to maintain or realize full-employment in situations where there is involuntary unemployment with growth by technical progress under deflation or inflation. In a three-periods (generations) overlapping generations model of this paper consumptions in the childhood period are financed by borrowing money from the previous generation consumers, and these debts must be repaid in the next period. In such a model consumers have debts as well as savings. Mainly we show the following results. If the deflation rate is equal to the technical progress rate, in order to maintain a steady state with constant employment, including full-employment, a balanced budget is required. If the deflation rate is smaller than the technical progress rate or the inflation occurs and the savings of consumers (net of pay-as-you-o pensions) are larger (or smaller) than their debts, in order to maintain constant employment a budget deficit (or surplus) is required. Also we show that fiscal policy to realize full-employment in a situation with involuntary unemployment usually requires larger budget deficit (or smaller surplus). These budget deficits, including those in the full-employment state, should be financed by seigniorage not by public debt. If they are financed by public debts, they do not have to be repaid. Conversely, the budget surplus in some cases should not be returned to consumers as tax reduction.

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