Macroeconomists often start their analysis from an accounting identity or set of identities. Since identities are true by definition, they can provide a good framework for analysis, including a way to detect any errors in logic or inconsistent conclusions. A theory that conforms to an identity is not necessarily correct but is at least potentially correct. To constitute a theory, though, it is necessary to do more than just invoke identities. This is because identities in themselves tell us nothing about causation.
In a recent post, “Franc Thoughts On Long-Run Fiscal Issues”, Paul Krugman has once again engaged with Modern Monetary Theory (MMT). His main argument this time concerns the difference, if any, between issuing debt when the government net spends rather than simply allowing balances to mount in reserve accounts. He agrees that under current circumstances zero interest short-term debt and zero-interest reserves are close substitutes, but argues that issuing debt and allowing reserves to mount will have different macroeconomic implications when interest rates are positive.