Skip to main content

Modern Monetary Theory: A New Paradigm for Money and Fiscal Policy



What is Modern Monetary Theory and why does it matter?

Modern Monetary Theory (MMT) is a macroeconomic theory that puts the functioning of the monetary system at the center of its analysis. It has post-Keynesian roots and has gained popularity in recent years with its core claim that a state that issues its own currency does not have to fear insolvency1.

The basics of MMT

According to MMT, money is not a scarce commodity that the state has to collect from the private sector through taxes or borrowing before it can spend. Rather, money is a legal and social institution that the state creates and regulates through its monopoly power2. The state can use its currency-issuing capacity to finance its spending and achieve public policy goals, such as full employment, social welfare, and environmental sustainability3.

The main constraint on the state’s spending is not the budget deficit or the public debt, but the availability of real resources (labor, capital, and natural resources) in the economy. If the state spends more than what the economy can produce, it will cause inflation, which erodes the purchasing power of money. To prevent inflation, the state can use fiscal policy (taxes and spending) and monetary policy (interest rates and bond issuance) to manage the aggregate demand and supply in the economy2.

The implications of MMT

MMT challenges some of the conventional wisdoms in mainstream economics, such as:

  • The state should balance its budget over the business cycle or achieve a primary surplus to stabilize its debt-to-GDP ratio.
  • The state should borrow from the private sector or foreign creditors to finance its deficit spending.
  • The state should maintain a positive interest rate to attract investors and savers.
  • The state should avoid printing money to finance its spending, as it will lead to hyperinflation.

MMT argues that these are not universal or natural laws, but rather self-imposed or institutional constraints that can be changed or removed by the state. For example:

  • The state does not need to balance its budget or achieve a primary surplus, as it can always service its debt denominated in its own currency. The appropriate fiscal stance depends on the economic conditions and the policy objectives of the state.
  • The state does not need to borrow from the private sector or foreign creditors, as it can create money through its spending. The purpose of bond issuance is not to finance the deficit, but to provide a safe and liquid asset for the private sector and to conduct monetary policy.
  • The state does not need to maintain a positive interest rate, as it can set the interest rate at any level it desires. A low or zero interest rate can reduce the cost of public debt and stimulate private investment and consumption.
  • The state does not need to avoid printing money, as long as it does not exceed the productive capacity of the economy. Creating money can enable the state to mobilize idle resources and achieve full employment.

The relevance of MMT

MMT offers a new perspective on how we think about money, fiscal policy, and macroeconomic stability. It also provides a framework for designing alternative policies that can address some of the pressing issues of our time, such as:

  • How to deal with the economic and social consequences of the COVID-19 pandemic?
  • How to finance a green transition to combat climate change?
  • How to reduce inequality and poverty in a globalized world?
  • How to reform the international monetary system to promote cooperation and development?

MMT is not a panacea or a magic bullet, but rather a lens that helps us see more clearly the possibilities and limitations of our monetary system. It invites us to question some of the assumptions and myths that have shaped our economic thinking and policymaking for decades. It also challenges us to imagine and create a more just and sustainable world.

I hope you enjoyed this blog post. If you want to learn more about MMT, you can check out these sources:

Comments

Post a Comment

Popular posts from this blog

How Social Media Impacts Your Finances: The Good, The Bad, and The Ugly

  The Economics of Social Media: How It Affects Your Wallet Social media platforms, such as Facebook, Twitter, Instagram, and TikTok, have become ubiquitous in the modern economy and fundamentally changed how people interact, communicate, and consume information. But what are the economic implications of social media for individuals, businesses, and society? How does social media affect your wallet, both positively and negatively? In this blog post, we will explore some of the main aspects of the economics of social media, based on the latest research and evidence. The Production of User-Generated Content One of the distinctive features of social media platforms is that they rely on user-generated content (UGC), which is any form of content, such as text, images, videos, or audio, that is created and shared by users. UGC is the main source of value for social media platforms, as it attracts and retains users, generates data, and enables targeted advertising. However, UGC also poses...
Post a Comment
Read more

Book Review: Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones by James Clear

  Atomic Habits by James Clear is an absolute game-changer for anyone looking to build good habits and break bad ones. This book has truly revolutionized the way I think about habits and how they impact our lives. Clear's writing is easy to follow and understand, and he provides practical and actionable steps to help you create the habits you want in your life. One of the things I loved most about this book was the emphasis on making small, incremental changes. Clear explains how small changes over time can lead to big results, and how even the smallest of habits can have a profound impact on our lives. This idea was incredibly empowering to me, as it means that anyone can make a change in their life, no matter how small it may seem. Another aspect of the book that I found incredibly helpful was Clear's focus on the systems and processes that drive our habits. By understanding the underlying systems and processes, we can more easily create new habits and break old ones. Clear p...
Post a Comment
Read more

How to Spot and Avoid Spoofing in Crypto: A Guide to Order Books and Market Manipulation

Order Books and Spoofing (Crypto’s “Spoofy”) Explained in One Minute: Definition, Legal Issues, etc. If you are a crypto trader, you may have heard of terms like order books and spoofing. But what do they mean and how do they affect the market? In this post, we will explain these concepts in one minute and help you understand the risks and opportunities they present. What Are Order Books? Order books are simply records of all the buy and sell orders that are placed on a crypto exchange for a specific asset. They show the price and quantity of each order, as well as the time and date they were placed. Order books are useful for traders because they provide information about the supply and demand of the market, as well as the liquidity and volatility of the asset. For example, if you want to buy Bitcoin, you can look at the order book and see how many sellers are willing to sell at different prices. You can also see how many buyers are competing with you for the same asset. This can help...
Post a Comment
Read more