The ‘meat and potatoes’ theoretical claim of MMT is that sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained and do not need taxes to finance their spending. It is now time to engage what it is about. The previous section highlighted what MMT is not about. Whether deficits are bond- or money-financed is not germane to MMT's larger theoretical claim about sovereign governments being financially unconstrained. That is a political economy issue which has long been understood, and MMT takes a particular stance. The money- versus bond-financing question is an institutional design and policy choice question, with MMT supporters tending to advocate that the fiscal authority be given direct access to the central bank's power to issue money. However, if the central bank is targeting interest rates or engaging in quantitative easing (QE), there is some implicit money-financing via central bank bond purchases. Current institutional arrangements have fiscal deficits financed by bonds. As shown above, both money- and bond-financed fiscal policy are effective in Keynesian theory, and money-financed deficits are more expansionary because they deter any proclivity to interest rate crowding-out from increased bond supplies. That said, its printing press approach to government spending is proving a popular political polemic, countering neoliberal polemic which justifies fiscal austerity by describing government as akin to a household.Ģ.3 Money- versus bond-financed fiscal deficits is not the issue The conclusion is MMT's analytic shortcomings render it poor economics. MMT neglects those costly ramifications, leading it to underestimate the economic costs and exaggerate the capabilities of deficit-financed fiscal policy. However, budget deficits can have costly ramifications measured in terms of government's policy objectives, which can deter government from deficit spending. MMT focuses on government's technical capacity to issue money, which seemingly renders government financially unconstrained. The paper analyses and dissects the three legs of the triad and shows they all involve suspect economic arguments. That means modern money came into being because government issued it as a form of IOU token to pay for goods, and those tokens were accepted because they could be used to pay taxes. The historical claim is that money's origins are chartal. The third leg of the triad is the history of money, which is invoked to enlist monetary history on MMT's side. That component is the policy component, and it claims to show how the economics of MMT can be harnessed by policy to deliver non-inflationary full employment. The second leg of the triad is the job guarantee program (JGP), whereby the government acts as employer of last resort (ELR). It describes MMT's view of how government finance works, why taxes are not needed to finance spending, and why government is financially unconstrained. The ‘meat and potatoes’ component is the macroeconomics of money- and bond-financed budget deficits. The employer of last resort or job guarantee program andįigure 1 Overview of Modern Money Theory (MMT)Ĭitation: Review of Keynesian Economics 8, 4 10.4337/roke.2020.04.02 The macroeconomics of money- and bond-financed budget deficits Instead, the role of taxes is to drain money out of the economy after government has spent it, in order to manage aggregate demand and keep it in line with the available supply of resources.Īs shown in Figure 1, MMT rests on a triad of arguments concerning: 3Īccording to MMT, a corollary implication of that is taxes are not needed to finance spending. If they are not available, creating money to buy goods causes inflation. If the resources are available, government can buy them and pay for them by creating money. The only constraint on government is the availability of real resources. That is because government has the power to create money to pay its bills, including its debts. The essence of MMT is that sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. An early comprehensive statement of MMT is provided in Wray's 1998 book Understanding Modern Money: The Key to Full Employment and Price Stability. Australian economist William Mitchell is also a leading contributor. Leading contributors include Warren Mosler, Stefanie Kelton, and Randall Wray. 1 MMT is associated with a small overlapping group of economists at the University of Missouri, Kansas City, and the Levy Economics Institute, NY, USA. Recently, there has been a burst of interest in Modern Money Theory (MMT).
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