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Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox[1] macroeconomic theory that describes the nature of money[2] within a fiat, floating exchange rate system.[3] 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[4] and Wynne Godley's sectoral balances approach.[5] Economists Warren Mosler, L. Randall Wray, Stephanie Kelton,[6] Bill Mitchell and Pavlina R. Tcherneva are largely responsible for reviving the idea of chartalism as an explanation of money creation.
MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities by itself. MMT states that the government is the monopoly issuer of the currency and therefore must spend currency into existence before any tax revenue could be collected.[1] The government spends currency into existence and taxpayers use that currency to pay their obligations to the state.[2] This means that taxes cannot fund public spending,[3] as the government cannot collect money back in taxes until after it is already in circulation. In this currency system, the government is never constrained in its ability to pay,[3] rather the limits are the real resources available for purchase in the currency.[3]
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 can be controlled by increasing taxes on everyone, to reduce the spending capacity of the private sector.[2]:150[7][8]
MMT is opposed to the mainstream understanding of macroeconomic theory and has been criticized heavily by many mainstream economists.[9][10][11][12] MMT is also strongly opposed by members of the Austrian school of economics.[13] 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.[14]
- ^ a b
- Chohan, Usman W. (6 April 2020). "Modern Monetary Theory (MMT): A General Introduction". CASS Working Papers on Economics & National Affairs. Social Science Research Network. SSRN 3569416. EC017UC (2020).
- Edwards, Sebastian (2019). "Modern monetary theory: Cautionary tales from Latin America". Cato Journal. 39 (3): 529. doi:10.36009/CJ.39.3.3. S2CID 195792372.
- Kosaka, Norihiko (6 August 2019). "The Heterodox Modern Monetary Theory and Its Challenges for Japan". Nippon. Retrieved 27 July 2020.
- Krugman, Paul (12 February 2019). "How Much Does Heterodoxy Help Progressives? (Wonkish)" (Opinion). The New York Times. Retrieved 27 July 2020.
- Raposo, Ines Goncalves (11 June 2019). "On Modern Monetary Theory". Bruegel. Retrieved 27 July 2020.
- ^ a b c Wray, L. Randall (2015). Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Houndmills, Basingstoke, Hampshire New York, NY: Palgrave Macmillan. pp. 12–13, 137–141, 160–161, 199–206, 248–266. ISBN 978-1-137-53990-8.
- ^ a b c d Cite error: The named reference
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:0was invoked but never defined (see the help page). - ^ Coy, Peter; Dmitrieva, Katia; Boesler, Matthew (21 March 2019). "Warren Buffett Hates It. AOC Is for It. A Beginner's Guide to Modern Monetary Theory". Bloomberg Businessweek.
- ^ Cite error: The named reference
WSJ_2021-11-21was invoked but never defined (see the help page). - ^ Krugmann, Paul (25 February 2019). "Running on MMT (wonkish)". The New York Times.
- ^ Mankiw, N. Gregory (2020). "A Skeptic's Guide to Modern Monetary Theory". AEA Papers and Proceedings. 110: 141–44. doi:10.1257/pandp.20201102. ISSN 2574-0768. S2CID 219804544.
- ^ Cohen, Patricia (5 April 2019). "Modern Monetary Theory Finds an Embrace in an Unexpected Place: Wall Street". The New York Times.
To many mainstream economists, though, M.M.T. is a confused mishmash that proponents use to support their political objectives, whether big government programs like "Medicare for all" and the Green New Deal or smaller taxes. ... From this perspective, M.M.T. is a version of free-lunchonomics, leaving the next generation to pay for this generation's profligacy. Although several prominent mainstream economists have recently revised their thinking about the risks of large government debt, they continue to reject other tenets of M.M.T. At some point, they insist, if the government just creates money to pay the bills, hyperinflation will kick in.
- ^ Smialek, Jeanna (6 February 2019). "Is This What Winning Looks Like?". The New York Times.
The theory picked up some fervent followers but limited popular acceptance, charitably, and outright derision, uncharitably. Mainstream economists panned it as overly simplistic. Many were confused about what it was arguing. "I have heard pretty extreme claims attributed to that framework and I don't know whether that's fair or not," Jerome H. Powell, the Fed chair, said in 2019. "The idea that deficits don't matter for countries that can borrow in their own currency is just wrong."
- ^ Carney, John (27 December 2011). "Modern Monetary Theory and Austrian Economics". CNBC. Retrieved 17 April 2024.
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