Munich Personal RePEc Archive

Fiscal policy for full-employment and debt dynamics: An attempt of mathematical analysis of MMT

Tanaka, Yasuhito (2019): Fiscal policy for full-employment and debt dynamics: An attempt of mathematical analysis of MMT.

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Abstract

We examine the effects of a fiscal policy which realizes full-employment from a state of under-employment (a sate with deflationary GDP gap). We show that the larger the growth rate of real GDP or the government expenditure by a fiscal policy over the ordinary growth rate is, the smaller the debt-to-GDP ratio at the time when full-employment is realized is, and an aggressive fiscal policy for full-employment can reduce the debt-to-GDP ratio. Therefore, full-employment can be realized by a fiscal policy with smaller debt-to-GDP ratio than before the fiscal policy. An increase in the government expenditure may induce a rise of the interest rate. Since the higher the interest rate is, the larger the debt-to-GDP ratio is, we need an appropriate monetary policy which maintains the low interest rate. Also we show that the condition about propensity to consume for realization of full-employment within one year from under-employment state without increasing the debt-to-GDP ratio before fiscal policy is not demanding. This paper is an attempt of mathematical analysis in a spirit of Modern Monetary Theory.

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