The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Functional Finance

  • David Colander
Reference work entry


The term ‘functional finance’ was created by Abba Lerner to contrast with sound finance. It involves making decisions about the deficit and the money supply with regard to their functionality, not some abstract moralistic premise. While it seems to play no role in the dynamic stochastic general equilibrium model prevalent in macroeconomics today, it does play a potential role in a more complex model where heterogeneous agents with limited information interact in a model with many different aggregate equilibria. Yet Lerner’s functional finance theoretical model is far too simple to be acceptable, even as a rough guide for policy.


Budget deficits Coordination problems Functional finance General equilibrium Great depression Incomes policy Inflation Keynesianism Lerner, A. Macroeconomic externalities Money supply Multiple equilibria in macroeconomics National debt Optimal taxation Sound finance Stagflation 

JEL Classifications

E0 B2 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • David Colander
    • 1
  1. 1.