Mathematical Model of MMT with Profit Return under Monopolistic Competition

Abstract

Even under constant returns to scale technology there is a positive profit return if the goods are produced in monopolistic competition. By a two-periods overlapping generations (OLG) model with production in monopolistic competition under constant returns to scale in which the economy grows by technological progress and the older generation consumers receive the profits, we consider the problem of budget deficit. We show that the budget deficit equals the difference between the net savings of the younger generation consumers excluding the profits received in the future and that of the older generation consumers in each of the following cases. Also, the following results will be proved. 1) A budget deficit is necessary to realize full employment with constant price when the economy grows. 2) If the budget deficit exceeds the level necessary and sufficient to maintain full employment in a growing economy with constant price, inflation will occur. A stable budget deficit is necessary to prevent further inflation. 3) If the budget deficit is insufficient to maintain full employment, a recession with involuntary unemployment occurs. We can overcome a recession and restore full employment making a budget deficit larger than the one necessary and sufficient to maintain full employment without a recession. Since we can maintain full employment by constant budget deficits, we should not offset the deficit created for overcoming the recession by budget surpluses.