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Mankiew just released a https://scholar.harvard.edu/files/mankiw/files/skeptics_guide_to_modern_monetary_theory.pdf he prepared for a talk on Modern Monetary Theory for the AEA. I thought that this might be of interest to many people on this forum since Mankiew's talk is very short and informal. There is not a single equation to be found, but he took the time to sort through a textbook written by proponents of the theory so he could contrast it with mainstream macroeconomics.
The document is short, to the point and overall it is interesting. I think that Mankiew does a good job of capturing some of the intuition behind a very large class of macroeconomic models we call "New Keynesian" models, so the contrast he makes between MMT and NK models probably is meaningful.
I have debated some policy issues with some of its proponents on this forum and I have always felt uneasy about some of the more radical conclusions they have drawn. In particular, I have expressed some of the same concern Mankiew expresses here with respect to the capacity of governments to preclude default through monetary creation. It always felt like these people were creating things out of nowhere, but I now see better what they meant because Mankiew took the pain of translating their idea of exploiting some slack in production capacity into terms I can understand. It sounds a lot less like voodoo, though it still sound like a politically motivated exaggeration.
Quick background on New Keynesian models
For people who are curious about what are New Keynesian models, I can provide some basic context. They are part of what we call dynamic stochastic general equilibrium (DSGE) models. Those models think of business cycle fluctuations are resulting from a flow of random disturbances to which households and firms (and possibly governments and central banks) react (hence the "stochastic" in DSGE). Moreover, those models work in a general equilibrium setting, meaning they treat all markets as interdependent, and they are dynamic meaning everyone involved is forward looking: people try to guess what is going to happen, so anticipations matters. What distinguishes NK models from their "real business cycle" (RBC) counterpart from the 80's and 90's is the presence of nominal rigidities. In the data, a good or service will change price about every 9 months, so we force the models to not allow all prices to adjust every single quarter. Similar things can be said about wages.
The document is short, to the point and overall it is interesting. I think that Mankiew does a good job of capturing some of the intuition behind a very large class of macroeconomic models we call "New Keynesian" models, so the contrast he makes between MMT and NK models probably is meaningful.
I have debated some policy issues with some of its proponents on this forum and I have always felt uneasy about some of the more radical conclusions they have drawn. In particular, I have expressed some of the same concern Mankiew expresses here with respect to the capacity of governments to preclude default through monetary creation. It always felt like these people were creating things out of nowhere, but I now see better what they meant because Mankiew took the pain of translating their idea of exploiting some slack in production capacity into terms I can understand. It sounds a lot less like voodoo, though it still sound like a politically motivated exaggeration.
Quick background on New Keynesian models
For people who are curious about what are New Keynesian models, I can provide some basic context. They are part of what we call dynamic stochastic general equilibrium (DSGE) models. Those models think of business cycle fluctuations are resulting from a flow of random disturbances to which households and firms (and possibly governments and central banks) react (hence the "stochastic" in DSGE). Moreover, those models work in a general equilibrium setting, meaning they treat all markets as interdependent, and they are dynamic meaning everyone involved is forward looking: people try to guess what is going to happen, so anticipations matters. What distinguishes NK models from their "real business cycle" (RBC) counterpart from the 80's and 90's is the presence of nominal rigidities. In the data, a good or service will change price about every 9 months, so we force the models to not allow all prices to adjust every single quarter. Similar things can be said about wages.