Modern Monetary Theory

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory concerning the role of fiscal and monetary policy in sovereign governments that borrow and issue government debt in their own currency. MMT departs from the mainstream economic consensus by rejecting the conventional model of central bank independence. MMT argues that responsibility for achieving full employment while maintaining price stability should rest with the elected government, with the central bank limited to accommodating the government's fiscal needs. In MMT, public expenditure is financed through money creation, with no intention of later refinancing it through taxes. MMT proponents acknowledge that money-financed spending is sustainable only while the economy has spare capacity, such as unemployed workers and underused production facilities. Once full capacity is reached, further money creation will generate inflation, which the government should counter by raising taxes to reduce private consumption and investment. In addition to its macroeconomic policy proposals, MMT includes a theory of money often associated with neo-chartalism, principles based on national income accounting, and labour market proposals such as a job guarantee. 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. MMT is opposed to the mainstream neoclassical macroeconomic frameworks and has been criticized by many mainstream economists. In a 2019 survey of top U.S. economists not a single respondent agreed with the basic aspects of MMT. MMT has also been rejected by many economists from otherwise divergent schools of thought, including Keynesian and Austrian economists.