Modern Monetary Theory: Revising Money Demand and Supply from Umer Chapra's Perspective

The global crisis and the COVID-19 pandemic have intensified the debate surrounding Modern Monetary Theory (MMT), particularly as nations resort to budget deficits. MMT economists argue that the central government, not constrained by fiscal limits, can maintain effective demand to achieve public goals like full employment and economic growth. However, economists remain skeptical about the permissiveness of MMT in generating new money. Extensive research is needed to explore the foundation of money supply and demand, examining if it truly achieves economic goals or leads to failure. Umer Chapra offers a profound monetary perspective, considering the demand and supply of money in the Islamic monetary system that aims for justice. This study aims to examine MMT's money demand and supply from Chapra's viewpoint, incorporating its economic goals. Employing a qualitative approach based on library research, this study finds that the endogenous MMT money demand model requires revision within Chapra's framework. To avoid misallocation and achieve economic objectives, the study suggests adopting Chapra's recommendations, such as eliminating bank interest in credit allocation and controlling unproductive and speculative money demand. This ensures that the MMT idea of endogenous money functions properly. However, further research is needed to address the techniques for avoiding money demand in the speculative sector, an area where Chapra's work lacks detail. Collaboration among Muslim economists can fill this gap and enrich the discussion. By bridging this gap, this study contributes to the ongoing discussion on monetary policy and provides valuable insights for policymakers and economists.