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Ed Dolan: Debt, Growth and Inflation: Some Inconvenient Truths

Written by Ed Dolan Monday, 28 January 2013 15:28
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In a series of posts[1] [2] [3] [4] [5] over the last couple of months, fellowEconomonitor blogger L. Randall Wray and I have been exploring the conditions under which the government’s debt can be said to be sustainable.

 

Wray writes from the point of view of Modern Monetary Theory (MMT), while I adopt a more eclectic and skeptical approach.

 

A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G.

 

(We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.)

 

To read the whole article goto:

 

http://www.economonitor.com/dolanecon/2013/01/28/debt-sustainability-growth-interest-rates-and-inflation-some-charts-for-discussion-and-some-inconvenient-truths-for-mmt/

 

About Ed 


Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University.

 

Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment. During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington’s San Juan Islands.

 

He is the author of There Aint No Such Thing As A Free Lunch

Last modified on Tuesday, 29 January 2013 11:49

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