Modern Monetary Theory

MMT's main tenets are that a government that issues its own fiat money: • Creates money with any and all government spending • Effectively destroys money via taxation rather than relying upon discretionary tax changes • Has the option to issue bonds as a monetary policy device or savings device for the private sector. Bonds cannot act as a means of funding public spending. The government can set whatever price for bonds it decides. ==Comparison with mainstream economics==

Françoise Drumetz and Christian Pfister (Bank of France) summarise the main differences between MMT and mainstream macroeconomics in the table below. ==History==

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. Knapp wrote in 1905 that "money is a creature of law", rather than a commodity. Knapp contrasted his state theory of money with the Gold Standard view of "metallism", where the value of a unit of currency depends on the quantity of precious metal it contains or for which it may be exchanged. He said that the state can create pure paper money and make it exchangeable by recognizing it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices". but proponents of MMT such as Randall Wray and Mathew Forstater said that more general statements appearing to support a chartalist view of tax-driven paper money appear in the earlier writings of many classical economists, Alfred Mitchell-Innes wrote in 1914 that money exists not as a medium of exchange but as a standard of deferred payment, with government money being debt the government may reclaim through taxation. Innes said: Knapp and "chartalism" are referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money and appear to have influenced Keynesian ideas on the role of the state in the economy. By 1947, when Abba Lerner wrote his article "Money as a Creature of the State", economists had largely abandoned the idea that the value of money was closely linked to gold. Hyman Minsky seemed to favor a chartalist approach to understanding money creation in his Stabilizing an Unstable Economy, lists the differences between bank money and state money. In 1996, Wynne Godley wrote an article on his sectoral balances approach, which MMT draws from. Rodger Malcolm Mitchell's book Free Money (1996) describes in layman's terms the essence of chartalism. Pavlina R. Tcherneva has developed the first mathematical framework for MMT and has largely focused on developing the idea of the job guarantee. Bill Mitchell, professor of economics and Director of the Centre of Full Employment and Equity (CoFEE) at the University of Newcastle in Australia, coined the term . In their 2008 book Full Employment Abandoned'', Mitchell and Joan Muysken use the term to explain monetary systems in which national governments have a monopoly on issuing fiat currency and where a floating exchange rate frees monetary policy from the need to protect foreign exchange reserves. By 2013, MMT had attracted a popular following through academic blogs and other websites. In 2019, MMT became a major topic of debate after U.S. Representative Alexandria Ocasio-Cortez said in January that the theory should be a larger part of the conversation. In February 2019, Macroeconomics became the first academic textbook based on the theory, published by Bill Mitchell, Randall Wray, and Martin Watts. In June 2020, Stephanie Kelton's MMT book The Deficit Myth became a New York Times bestseller. ==Theoretical approach==

In sovereign financial systems, banks can create money, but these "horizontal" transactions do not increase net financial assets because assets are offset by liabilities. According to MMT advocates, "The balance sheet of the government does not include any domestic monetary instrument on its asset side; it owns no money. All monetary instruments issued by the government are on its liability side and are created and destroyed with spending and taxing or bond offerings." In MMT, "vertical money" enters circulation through government spending. Taxation and its legal tender enable power to discharge debt and establish fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation. In addition, fines, fees, and licenses create demand for the currency. This currency can be issued by the domestic government or by using a foreign, accepted currency. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, underpins the value of the currency. Because the government can issue its own currency at will, 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. The approach of MMT typically reverses theories of governmental austerity. The policy implications of the two are likewise typically opposed. Vertical transactions with the three sectors, the computation of the surplus or deficit balances for each and the flows between them MMT labels a transaction between a government entity (public sector) and a non-government entity (private sector) as a "vertical transaction". The government sector includes the treasury and central bank. The non-government sector includes domestic and foreign private individuals and firms (including the private banking system) and foreign buyers and sellers of the currency. ==Interaction between government and the banking sector==

MMT is based on an account of the "operational realities" of interactions between the government and its central bank, and the commercial banking sector, with proponents like Scott Fullwiler arguing that understanding reserve accounting is critical to understanding monetary policy options. A sovereign government typically has an operating account with the country's central bank. From this account, the government can spend and also receive taxes and other inflows. Each commercial bank also has an account with the central bank, by means of which it manages its reserves (that is, money for clearing and settling interbank transactions). When a government spends money, its central bank debits its Treasury's operating account and credits the reserve accounts of the commercial banks. The commercial bank of the final recipient will then credit up this recipient's deposit account by issuing bank money. This spending increases the total reserve deposits in the commercial bank sector. Taxation works in reverse: taxpayers have their bank deposit accounts debited, along with their bank's reserve account being debited to pay the government; thus, deposits in the commercial banking sector fall. The latter facility is a type of open market operation to help ensure interest rates remain at a target level. According to MMT, the issuing of government bonds is best understood as an operation to adjust the composition and maturity of government liabilities held by the non-government sector rather than a requirement to finance government expenditure. ==Horizontal transactions==

MMT economists describe any transactions within the private sector as "horizontal" transactions, including the expansion of the broad money supply through the extension of credit by banks. MMT economists regard the concept of the money multiplier, where a bank is completely constrained in lending through the deposits it holds and its capital requirement, as misleading. Rather than being a practical limitation on lending, the cost of borrowing funds from the interbank market (or the central bank) represents a profitability consideration when the private bank lends in excess of its reserve or capital requirements (see interaction between government and the banking sector). Effects on employment are used as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. ==Policy implications==

Economist Stephanie Kelton explained several points made by MMT in March 2019: • Under MMT, fiscal policy (i.e., government taxing and spending decisions) is the primary means of achieving full employment, establishing the budget deficit at the level necessary to reach that goal. In mainstream economics, monetary policy (i.e., Central Bank adjustment of interest rates and its balance sheet) is the primary mechanism, assuming there is some interest rate low enough to achieve full employment. Kelton said that "cutting interest rates is ineffective in a slump" because businesses, expecting weak profits and few customers, will not invest even at very low interest rates. • Government interest expenses are proportional to interest rates, so raising rates is a form of stimulus (it increases the budget deficit and injects money into the private sector, other things being equal); cutting rates is a form of austerity. • Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice versa. • Under MMT, expansionary fiscal policy, i.e., money creation to fund purchases, can increase bank reserves, which can lower interest rates. In mainstream economics, expansionary fiscal policy, i.e., debt issuance and spending, can result in higher interest rates, crowding out economic activity. Economist John T. Harvey explained several of the premises of MMT and their policy implications in March 2019: • The private sector treats labor as a cost to be minimized, so it cannot be expected to achieve full employment without government creating jobs, too, such as through a job guarantee. • The public sector's deficit is the private sector's surplus and vice versa, by accounting identity, which increased private sector debt during the Clinton-era budget surpluses. • Creating money activates idle resources, mainly labor. Not doing so is immoral. • Demand can be insensitive to interest rate changes, so a key mainstream assumption, that lower interest rates lead to higher demand, is questionable. • There is a "free lunch" in creating money to fund government expenditure to achieve full employment. Unemployment is a burden; full employment is not. • Creating money alone does not cause inflation; spending it when the economy is at full employment can. MMT economists say that inflation can be better controlled (than by setting interest rates) with new or increased taxes to remove extra money from the economy. These tax increases would be on everyone, not just billionaires, since the majority of spending is by average Americans. == International applications and limitations ==

Monetary sovereignty spectrum MMT economists recognize that monetary sovereignty exists on a spectrum rather than as a binary condition: Full monetary sovereignty: Countries like the US, Japan, the UK, Australia, and Canada that issue their own floating currencies can implement MMT prescriptions most fully. Japan's experience with low interest rates and high debt-to-GDP ratios is cited by MMT economists. Limited monetary sovereignty: Eurozone members share a common currency but lack individual monetary control. MMT economists argue that Eurozone countries face fiscal constraints similar to US states. Constrained monetary sovereignty: Countries with high foreign currency debt or a history of currency crises like Argentina have constrained monetary sovereignty. International policy debates Japan: Policymakers have debated MMT principles including the sustainability of high government debt levels, the effectiveness of monetary policy at the "zero lower bound," and consumption taxes. European Union: MMT’s relevance to Eurozone fiscal policy and COVID-19 response has been debated, along with ordoliberal vs southern European state financing. Developing countries: Import dependencies and foreign currency constraints have limited MMT applicability. India debated policy space and China infrastructure investment. In a 2024 study, Chunping Liu, Patrick Minford, and Zhirong Ou tested MMT in the case of the United States using a macroeconomic model of post-2008 financial crisis economy. They compared a model based on MMT, in which government deficits can be financed through money creation and inflation is mainly controlled through taxation, with a standard New Keynesian model. Their simulations suggested that the monetary-fiscal policy coordination advocated by MMT economists would bring no improvement in inflation or real interest rate stability, but would substantially destabilize output, undermine overall macroeconomic stability, and reduce household welfare. The authors therefore concluded that MMT does not provide a convincing basis for future economic policy. ==MMT in practice==

According to economist Sebastián Edwards, various cases in Latin America of government spending financed through money creation by the central bank bear similarities to the policy ideas advocated by MMT proponents. These episodes typically unfolded in several stages: first, a brief upturn driven by higher government spending, then the emergence of bottlenecks and imbalances, followed by price controls and exchange rate controls, a loss of confidence in the national currency because consumers abandon the domestic currency. Ultimately the government is replaced, and its successor faces the difficult task of restoring macroeconomic stability. In this context, Edwards discusses Chile (1970–1973), Peru (1985–1990), Argentina (2003–2015) and Venezuela (since 1998), noting that these countries had their own, non-pegged currency, a condition that is also considered important in MMT. According to Edwards, these cases were accompanied by very high inflation (for example 500% in Chile in 1973, 1000% in Venezuela in 2017 and 7000% in Peru in 1990), because the demand for the domestic currency collapsed. MMT proponent Stephanie Kelton has argued that Japan has been practising MMT for some time. According to economist Sayuri Shirai, this claim is widely regarded in Japan as a misunderstanding of the Bank of Japan’s policy, since large-scale government bond purchases and the maintenance of a yield target around 0% do not in themselves mean that Japan operates under an MMT regime. Kelton’s view was also rejected by Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda, who pointed to the government’s commitment to restoring fiscal discipline. According to Shirai, labour shortages, population ageing, and persistently low inflation make MMT-style fiscal stimulus difficult to implement in Japan. Shirai argues that Japan has little unused economic capacity remaining because adverse demographic trends have contributed to severe labour shortages. As a result, additional government spending could intensify labour market constraints and crowd out private sector activity. She also argues that a prolonged low-interest-rate environment may weaken productivity growth by sustaining zombie firms and discouraging necessary corporate restructuring. MMT proponents William Mitchell, Martin Watts, and L. Randall Wray also present Japan as evidence that a country can sustain persistent fiscal deficits and very high public debt, exceeding 200% of GDP, without triggering sharply higher interest rates or higher unemployment. Economist Mark Skousen argues, however, that this interpretation overlooks Japan’s weak economic growth since 1992, averaging about 0.9% per year in real terms, which he associates with prolonged large-scale deficit spending. ==Proponents==

MMT is associated with a small, overlapping group of economists linked to the University of Missouri–Kansas City and the Levy Economics Institute. Leading MMT advocates include Matthew Forstater, Scott Fullwiler, Stephanie Kelton, Bill Mitchell, Warren Mosler, and L. Randall Wray. According to Carnevali and Fontana, leading proponents of MMT have largely bypassed formal academic engagement with mainstream economists, rarely publishing formal academic papers aimed at persuading or debating with them, and have instead focused on influencing policy-makers and the wider public. They suggest that this strategy reflects the view among MMT scholars that mainstream economists are generally unreceptive to non-mainstream theories and policies and therefore MMT proponents have sought to build support outside academia, with the expectation that pressure from public debate and policy discussion would eventually force mainstream economists to take MMT seriously. Carnevali and Fontana argue that, as a result, much of the debate over MMT has taken place outside conventional scholarly settings, including in newspapers, social media, podcasts, and other forums dominated by non-professional economists. According to economist Gregory Mankiw, MMT emerged not from prominent academic debates at leading universities, but from a relatively small corner of academia. He argued that it only gained broad public attention after being promoted by high-profile politicians such as Bernie Sanders and Alexandria Ocasio-Cortez, because its tenets aligned with their policy preferences. ==Criticism==

A 2019 survey of leading economists by the University of Chicago Booth's Initiative on Global Markets showed a unanimous rejection of assertions attributed by the survey to MMT: "Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt" and "Countries that borrow in their own currency can finance as much real government spending as they want by creating money". The post-Keynesian economist Thomas Palley has stated that MMT is largely a restatement of elementary Keynesian economics, but prone to "over-simplistic analysis" and understating the risks of its policy implications. Palley has disagreed with proponents of MMT who have asserted that standard Keynesian analysis does not fully capture the accounting identities and financial restraints on a government that can issue its own money. He said that these insights are well captured by standard Keynesian stock-flow consistent IS-LM models, and have been well understood by Keynesian economists for decades. He claimed MMT "assumes away the problem of fiscal–monetary conflict" – that is, that the governmental body that creates the spending budget (e.g. the legislature) may refuse to cooperate with the governmental body that controls the money supply (e.g., the central bank). Paul Krugman, a New Keynesian economist and recipient of the Nobel Prize in Economics, asserted that MMT goes too far in its support for government budget deficits and ignores the inflationary implications of maintaining budget deficits when the economy is growing. Krugman accused MMT devotees as engaging in "calvinball" – a game from the comic strip Calvin and Hobbes in which the players change the rules at whim. Austrian School economist Robert P. Murphy stated that MMT is "dead wrong" and that "the MMT worldview doesn't live up to its promises". Marc Lavoie has said that whilst the neochartalist argument is "essentially correct", many of its counter-intuitive claims depend on a "confusing" and "fictitious" consolidation of government and central banking operations, which is what Palley calls "the problem of fiscal–monetary conflict". Fuders concluded that it is impossible to meaningfully address the problem of unsustainable growth or fulfill the sustainable development goals proposed by the United Nations without completely overhauling the monetary system in favor of demurrage currency. ==See also==