Modern Monetary Theory (MMT)

Type

Heterodox macroeconomic theory

Field

Macroeconomics

Key Insight

Governments cannot run out of money (in its own economy) because they create money when they spend.

Core Principle

Government issuing its own currency can finance spending by creating money.

Money Creation

Endogenous (created within the economy, as by government deficit spending or bank lending)

Nature of Money System

Fiat, floating exchange rate system

Contrasting Economic Concept

Fiscal austerity

Contrasting Economic Thought

Traditional economic thought (emphasizes dangers of large national debts and deficits)

Primary Constraint on Government Spending

Inflation

Secondary Constraint on Government Spending

Economy's productive capacity

1943-XX-XX

2013-XX-XX

2015-XX-XX

2019-03-XX

2019-08-23

2019-XX-XX

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. [...] 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. [...] Some contemporary proponents, such as Wray, place MMT within post-Keynesian economics, while MMT has been proposed as an alternative or complementary theory to monetary circuit theory, both being forms of endogenous money, i.e., money created within the economy, as by government deficit spending or bank lending, rather than from outside, perhaps with gold. In the complementary view, MMT explains the "vertical" (government-to-private and vice versa) interactions, while circuit theory is a model

Modern Monetary Theory is a macroeconomic model positing that countries that issue their currencies, such as the U.S., are not constrained in spending. Proponents of MMT argue that such countries can't default on the securities they issue, as they can print or issue more currency. Article Sources [...] Modern Monetary Theory (MMT) decrees that governments that issue their currency do not need to rely on taxes or borrowing for spending since they can print as much money as they need. Using MMT, these countries and policies should not be shaped by fears of rising national debt. [...] Modern Monetary Theory was developed by Warren Mosler, who wrote The 7 Deadly Innocent Frauds of Economic Policy, and it bears similarities to older schools of thought like functional finance and chartalism. Mosler argued that paying taxes is like taking cash directly to the IRS, which disposed of taxpayer money in a shredder.1

FIXED INCOME | GLOBAL FIXED INCOME TEAM | MACRO INSIGHT | MARCH 2019 AUTHOR JIM CARON Managing Director Global Fixed Income Team Modern Monetary Theory (MMT) represents a structural change in how we think about money, inflation and asset prices. It is an increasingly popular narrative that is widely discussed in the markets today. While the current debate is immediately unlikely to have a significant impact on asset prices, it has the potential to affect the future of economic policy in a way [...] As a basic breakdown of a complex topic, MMT can be understood in basic form to be the opposite of fiscal austerity. Fiscal austerity is the notion that a country’s deficit—or rather, its deficit/GDP ratio—matters. This ratio is akin to a default-risk level. MMT, by contrast, suggests that the deficit/GDP ratio is less important because as long as a country can print its own money, it can pay off its debts in perpetuity and without problems. In this theory, the creation of money by the

Recently, a “heterodox” school of monetary economics known as Modern Monetary Theory, or MMT, has gained attention, and a debate between proponents of MMT and “mainstream” economists has raged in the blogosphere. MMT is most usefully viewed as an alternative lens on the monetary and fiscal system rather than as a competing theory per se. Its main insight is that governments cannot really “run out of money” (in its own economy at least) because they create money when they spend. It might look as [...] Paul Sheard is a veteran central bank watcher and markets economist, who has written and spoken widely on QE and unconventional monetary policies. He most recently was Vice Chairman of S&P Global, after serving as Executive Vice President and Chief Economist and earlier Executive Managing Director and Chief Economist of Standard & Poor’s Ratings Services. Previously, he held chief economist positions at Nomura Securities and at Lehman Brothers and was Head of Japan Equity Investments at Baring [...] Background reading: L. Randall Wray, 2015: Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (second edition), Palgrave Macmillan Paul Sheard, 2013: “Repeat After Me: Banks Cannot and Do Not ‘Lend Out’ Reserves.pdf),” Standard & Poor’s Ratings Services RatingsDirect, 15pp Paul Sheard, 2019: “Central banks have unlimited ammunition – If they chose to use it.pdf),” Australian Financial Review, 23 August