Policy Forum 11 (July 2020)
Modern Monetary Theory (MMT) is the latest fashion in post-Keynesian heterodox macroeconomics. It has left the fringes of academia and is, by the standards of a relatively new economic theory, widely discussed outside academic circles. Stephanie Kelton, one of its proponents, is the economic advisor of Bernie Sanders, twice a serious contender in the Democratic primaries for the Presidency of the United States. This essay explains what MMT is and discusses its central claims. It turns out that many of its tenets are either not new and consistent with mainstream economics or wrong. Nonetheless, MMT promotes some ideas and perspectives that should not be dismissed outright.
The Money in MMT refers to an economy with fiat money. Fiat money means that the money issued by the central bank that has no intrinsic value. While this is the norm today, money used to represent a claim on a commodity in one form or another. MMT also does not allow for any management of the exchange rate that would constrain the Government in its monetary actions, for example, due to international agreements. In the MMT world, the central bank becomes an integral part of the Government and cannot make any independent decisions. Contrary to what its name might seem to imply, MMT is not just concerned with monetary policy but aims to be an alternative to mainstream macroeconomics, not just conventional monetary policy.