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Modern Money Theory 101: A Reply to Critics

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  • Eric Tymoigne
  • L. Randall Wray

Abstract

One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_778.

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Date of creation: Nov 2013
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Handle: RePEc:lev:wrkpap:wp_778

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Keywords: Modern Money Theory; Price Stability; Full Employment; Financial Stability; Money;

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  1. Scott T. Fullwiler, 2006. "Setting interest rates in the modern money era," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 28(3), pages 496-525, April.
  2. Louis-Philippe Rochon & Matias Vernengo & Louis-Philippe Rochon & Matias Vernengo, 2003. "State money and the real world: or chartalism and its discontents," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(1), pages 57-67, October.
  3. Ann-Marie Meulendyke, 1998. "U.S. monetary policy and financial markets," Monograph, Federal Reserve Bank of New York, number 1998mpaf.
  4. Marc Lavoie, 2013. "The Monetary and Fiscal Nexus of Neo-Chartalism: A Friendly Critique," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 47(1), pages 1-32, March.
  5. Alain Parguez, 1999. "The Expected Failure of the European Economic and Monetary Union: A False Money against the Real Economy," Eastern Economic Journal, Eastern Economic Association, vol. 25(1), pages 63-76, Winter.
  6. Hassan Bougrine & Mario Seccareccia, 2002. "Money, Taxes, Public Spending, and the State Within a Circuitist Perspective," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 32(3), pages 58-79, October.
  7. Marco Bassetto & Todd Messer, 2013. "Fiscal Consequences of Paying Interest on Reserves," Fiscal Studies, Institute for Fiscal Studies, vol. 34, pages 413-436, December.
  8. Milton Marquis, 2002. "Setting the interest rate," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct11.
  9. Claude Gnos & Louis-Philippe Rochon, 2002. "Money Creation and the State : A Critical Assessment of Chartalism," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 32(3), pages 41-57, October.
  10. Stephanie Bell & L. Randall Wray, 2002. "Fiscal effects on reserves and the independence of the Fed," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(2), pages 263-271, December.
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