<abstract xmlns="http://www.w3.org/1999/xhtml">

<sec><h3>Research background</h3>
<p>In the past few years, MMT (Modern Money Theory or Modern Monetary Theory) has been increasingly discussed in Japan as well as in the U.S. However, both in the U.S. and Japan, analysis using mathematics is lacking and analysis using IS-LM and AD-AS analysis methods in macroeconomics is almost non-existent.</p>
</sec>
<sec><h3>Purpose</h3>
<p>We present an AD-AS analysis from the perspective of Functional Finance Theory and MMT (Modern Monetary Theory).</p>
</sec>
<sec><h3>Research methodology</h3>
<p>Graphical analyses with some mathematical analyses. Mathematical analyses include graphic analysis using AD and AS curves and calculations to derive equations representing them based on models of consumer and firm behavior.</p>
</sec>
<sec><h3>Results</h3>
<p>Using an overlapping generations model under monopolistic competition we show the following results by calculations and graphical analyses.</p>
<p>1. The budget deficit (including interest payments on government bonds) equals an increase in the savings of consumers from period to period. This result means that the debt-GDP ratio would not diverge to infinity, but would remain at a finite value whether the interest rate of government bonds is larger or smaller than the growth rate.</p>
<p>2. We need a budget deficit (including interest payments) to maintain full employment without inflation under economic growth. However, if the interest rate of government bonds is larger than the growth rate, we need a budget surplus (excluding interest payments) to maintain full employment without inflation.</p>
<p>3. A return to full employment from a recession can be achieved by implementing the appropriate fiscal policies through increased government spending or tax cuts.</p>
<p>4. Excessive government expenditure or an insufficient tax under full employment induces inflation.</p>
</sec>
<sec><h3>Novelty</h3>
<p>This is probably the first AD-AS analysis done from the standpoint of Functional Finance Theory and MMT.</p>
</sec>
</abstract>

Research background
In the past few years, MMT (Modern Money Theory or Modern Monetary Theory) has been increasingly discussed in Japan as well as in the U.S. However, both in the U.S. and Japan, analysis using mathematics is lacking and analysis using IS-LM and AD-AS analysis methods in macroeconomics is almost non-existent.

Purpose
We present an AD-AS analysis from the perspective of Functional Finance Theory and MMT (Modern Monetary Theory).

Research methodology
Graphical analyses with some mathematical analyses. Mathematical analyses include graphic analysis using AD and AS curves and calculations to derive equations representing them based on models of consumer and firm behavior.

Results
Using an overlapping generations model under monopolistic competition we show the following results by calculations and graphical analyses.
1. The budget deficit (including interest payments on government bonds) equals an increase in the savings of consumers from period to period. This result means that the debt-GDP ratio would not diverge to infinity, but would remain at a finite value whether the interest rate of government bonds is larger or smaller than the growth rate.
2. We need a budget deficit (including interest payments) to maintain full employment without inflation under economic growth. However, if the interest rate of government bonds is larger than the growth rate, we need a budget surplus (excluding interest payments) to maintain full employment without inflation.
3. A return to full employment from a recession can be achieved by implementing the appropriate fiscal policies through increased government spending or tax cuts.
4. Excessive government expenditure or an insufficient tax under full employment induces inflation.

Novelty
This is probably the first AD-AS analysis done from the standpoint of Functional Finance Theory and MMT.

AD-AS Analysis from the Perspective of Functional Finance Theory and MMT

Folia Oeconomica Stetinensia

This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.

{"article-title":"AD-AS Analysis from the Perspective of Functional Finance Theory and MMT"}

Research background
In the past few years, MMT (Modern Money Theory or Modern Monetary Theory) has been increasingly discussed in Japan as well as in the U.S....

AD-AS Analysis from the Perspective of Functional Finance Theory and MMT

Published Online: Jun 09, 2023

Page range: 263 - 283

Received: Oct 08, 2022

Accepted: Feb 28, 2023

DOI: https://doi.org/10.2478/foli-2023-0014

Keywords
AD curve, AS curve, Functional Finance Theory, MMT (Modern Monetary Theory), budget deficit

© 2023 Yasuhito Tanaka, published by Sciendo

This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.

AD-AS Analysis from the Perspective of Functional Finance Theory and MMT

Published Online: Jun 09, 2023

Page range: 263 - 283

Received: Oct 08, 2022

Accepted: Feb 28, 2023

DOI: https://doi.org/10.2478/foli-2023-0014

KeywordsAD curve, AS curve, Functional Finance Theory, MMT (Modern Monetary Theory), budget deficit

© 2023 Yasuhito Tanaka, published by Sciendo

This work is licensed under the Creative Commons Attribution-ShareAlike 4.0 International License.

Keywords
AD curve, AS curve, Functional Finance Theory, MMT (Modern Monetary Theory), budget deficit