Unpacking the dynamics of fiscal deficits and debt

Martin Watts

Chapter 13 in The Elgar Companion to Modern Money Theory, 2024, pp 174-185 from Edward Elgar Publishing

Abstract: In the aftermath of the Global Financial Crisis, the public debt/GDP ratios of most Organisation for Economic Co-operation and Development countries rose significantly. The overwhelming message from leading international organisations was that fiscal austerity in combination with loose monetary policy would promote economic recovery. Eurozone members were held up to the Maastricht debt and deficit criteria. The periphery economies of the Eurozone experienced significant increases in interest rates and were forced to implement extreme austerity measures. During the COVID pandemic governments rapidly implemented stimulatory fiscal measures acknowledging the inevitability of higher fiscal deficits and debt in the years ahead. But the old shibboleths have persisted. This chapter highlights the key principles of MMT, with particular reference to the notion of Currency Sovereignty and the operation of the Payment System. It explains the orthodox treatment and interpretation of deficit and debt dynamics, which it then critiques. A critique of fiscal rules is then developed.

Keywords: Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2024
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