MMT based deficit spending spirals interest rates in the long term

“Where MMT departs from this literature is to explicitly integrate bank reserves into the analysis in a way that no previous Post Keynesian author has attempted. The MMT framework shows that far from placing upward pressure on interest rates, fiscal deficits in fact, set in place dynamics that place pressure on interest rates in the opposite direction. You will not find that result in the extant Post Keynesian or mainstream literature… Even the Post Keynesian economists consider crowding out to be overcome by the government’s capacity to print money” (Lavoie, 2014). It is nice of Mitchell to make a reference in his blog to my 2014 book on post-Keynesian economics. However credit must be given where credit is due. While MMT advocates Warren Mosler and Randall Wray (1998) were the first to claim that, all else equal, a government deficit would put downward pressure on the overnight rate, this analysis was quickly picked up by myself (Lavoie 2003) and other fellow post-Keynesians. In contrast to what Mitchell asserts, my 2014 book explains in detail why the government deficit leads to downward pressures on the overnight rate. In addition, in the introductory macro textbook that Mario Seccareccia and I adapted to the Canadian market, the same analysis is provided in very explicit terms (Baumol et al., 2009). This thus came ten years before MWW. Furthermore, the story being told by Mitchell is incomplete. While it is true that government deficits put downward pressures on the overnight interest rate, things are more complicated when it comes to other rates, for instance longer-term rates. With the help of a relatively simple stock-flow consistent model that incorporates several endogenous interest rates, Lavoie and Reissl (2018) show that a government deficit may or may not lead to an increase in these other rates, depending on the value of various parameters as well as those tied to portfolio decisions. Of course this result depend on the chosen model and its assumptions, but I believe that a wide variety of models would come to the same conclusion. Thus, as argued earlier, MMT needs to go beyond the institutional analysis of the payment system which is its forte, and incorporate the findings and tools of post-Keynesian economics if it wishes to provide a fully consistent macroeconomic theory. The example being provided here is directly related to monetary economics, but a lot also needs to be said about other aspects of macroeconomics such as growth theory or technical progress, not forgetting microeconomics and pricing theory.