Modern Monetary Theory
Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes the nature of money within a fiat, floating exchange rate system. MMT synthesizes ideas from the state theory of money of Georg Friedrich Knapp (also known as chartalism) and the credit theory of money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky’s views on the banking system and Wynne Godley’s sectoral balances approach. Economists Warren Mosler, L. Randall Wray, Stephanie Kelton, Bill Mitchell and Pavlina R. Tcherneva are largely responsible for reviving the idea of chartalism as an explanation of money creation.
MMT frames government spending and taxation differently to most orthodox frameworks. MMT states that the government is the monopoly issuer of its currency and therefore must spend currency into existence before any tax revenue can be collected. The government spends currency into existence and taxpayers use that currency to pay their obligations to the state. This means that taxes cannot fund public spending in a nominal monetary flow sense, as the government cannot collect money back in taxes until after it is has been issued into the economy. In this kind of monetary system, the government is never constrained in its ability to pay, rather the limits are the real resources available for purchase in the state’s currency.
MMT argues that the primary risk once the economy reaches full employment is demand-pull inflation, which acts as the only constraint on spending. MMT also argues that inflation pressures can be mitigated by increasing taxes on everyone, to reduce the spending capacity of the private sector, releasing real resources such that the state can employ them at current prices in a non-inflationary way.:150
The primary demand and inflation management approach advocated by most MMT economists is the Job Guarantee employer of last resort (ELR) programme. This provides a spend-side automatic fiscal stabilisation mechanism and establishes a nominal price anchor, utilising a buffer stock of employed labour. This is in contrast to the orthodox monetary dominance approach to demand management which involves adjusting interest rates and utilising a pool of unemployed labour as a buffer against inflationary pressures following a belief in a Phillip’s curve trade off between the two.
MMT is opposed to the mainstream neoclassical macroeconomic frameworks and has been criticized heavily by many mainstream economists. MMT is also strongly opposed by members of the Austrian school of economics. MMT’s applicability varies across countries depending on degree of monetary sovereignty, with contrasting implications for the United States versus Eurozone members or countries with currency substitution.
Modern Monetary Theory (MMT) is an economic framework that describes how a government with its own sovereign, fiat currency operates. The theory states that such a government can create money to spend into existence, and that it is not financially constrained from funding public projects because it can always issue more money. In this model, taxation is used to remove money from the economy to control inflation, not to fund spending, and the national debt is seen as the sum of past government deficits, which are essentially the private sector’s savings.
Core principles of MMT
- Governments can create money: A government that issues its own currency (like the US, UK, or Japan) can create money through its central bank to pay for its spending.
- Taxes are not for funding spending: Instead of collecting taxes to get money to spend, the government first spends money into the economy, and then taxes are used to remove money to control inflation and manage the money supply.
- The government can’t default on its own currency: A government that issues its own currency can’t be forced to default on its debt, because it has the power to create the necessary money to pay it off.
- Inflation is the real constraint: The primary limit on government spending is not the availability of money, but the risk of inflation if spending outstrips the economy’s ability to produce goods and services. MMT proponents suggest that if inflation were to become a problem, the government could raise taxes to cool the economy.
MMT vs. mainstream economics
- Money creation: MMT’s view of money creation by the government is different from mainstream economics, which emphasizes the government’s need to tax or borrow to spend.
- National debt: MMT views national debt differently, seeing it as private sector savings that come from past government spending, rather than a burden that must be repaid to external lenders.
- Budget balance: MMT suggests governments don’t need to balance their budgets in the same way a household does, as they are not subject to the same financial constraints. This suggests a focus on full employment and economic needs rather than fiscal austerity.
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[2] https://www.fraserinstitute.org/studies/primer-modern-monetary-theory
[3] wikipedia/en/Modern_monetary_theory
[6] wikipedia/en/Modern_Monetary_Theory
[7] https://www.mercatus.org/research/policy-briefs/how-reliable-modern-monetary-theory-guide-policy
[8] https://www.lowyinstitute.org/publications/modern-monetary-theory-mainstream-economics-converging
[9] https://www.rosalux.de/en/news/id/41764/modern-monetary-theory-in-the-periphery
[10] https://www.fraserinstitute.org/sites/default/files/primer-on-modern-monetary-theory.pdf
[12] https://cepr.org/voxeu/columns/modern-money-theory-and-its-implementation-and-challenges-case-japan
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