A Dynamic Optimization Approach to MMT-type Coordinated Fiscal and Monetary Stabilization Policy

In this paper, we aim to construct a dynamic Keynesian model incorporating the concepts of Modern Monetary Theory (MMT), a fiscal-dominant economic theory, and to use dynamic optimization to derive an optimal fiscal and monetary policy path. MMT is characterized by the dominance of fiscal policy over monetary policy and consider macroeconomic environment (inflation) being the limit of fiscal expansion, rather than a government debt ceiling, or a “sound” budget balance. We incorporate these MMT elements into the model, referring to previous studies. Ultimately, we confirm stability/instability at the equilibrium point and consider the validity of application to the fiscal and monetary policies in the real world. The conclusion suggests 1) forward-looking environment where economic agents trust their central bank policy 2) inflation target is sufficiently high, and 3) nominal interest rate is sufficiently low are desirable. Under these economic conditions, the dynamic system converges to an equilibrium point, while confirming the point is “stable” and “determinate”. Stability implies that the economy settles at the equilibrium point without experiencing overheating or stagnation, and money supply and inflation expectations do not diverge upward or down- ward. This argument serves as a counterpoint to frequent criticisms of MMT, asserting that fiscal-dominant economic policies envisioned by MMT cannot stabilize the economy.