Modern Monetary Theory (MMT)/Neo-Chartalism has gained increasing attention last couple of years, i.e. in Bloomberg, and also a lot of interesting critique. Here’s some notes and links.

Common ideas associated with MMT (see Wray): Money is a creature of the state (Chartalism). Private sector relations (banks) are important for the creation of money supply, if government allows it (endogenous money theory). Governments with own currency and central bank (sovereign state) can not run out of money and doesn’t need taxes to spend. Full employment and price stability is possible if government act as employer of last resort (EPL), financing deficits with money-printing. Imbalance between government spending and taxes results in inflation.

  1. Palley 2013: MMT lacks theoretical key aspects and doesn’t add anything. Not all of Palleys points seems 100% fair, but is definitely relevant for a lot of comments out there.
    • Everybody knows government can print money, but should they/we? MMT ignores positive aspects of central bank independence. A useful addition would be the use of older Keynesian stock-flow consistent ISLM analysis.
    • Some MMT:ers seems to lack explicit inflation theory, missing the basic Phillips curve relation, as well as problems with inflation expectations. A lot of MMT stuff ignores open economy difficulties; possible connections between exchange rate and inflation; problems arising from current account imbalances, and mobile capital markets.
    • Government bonds is useful for financial markets and political legitimacy. Deactivating high-powered money, created by deficit government spending, may be difficult. Some MMT and Keynesians seems to want to solve deeper problems of income distribution and supply-side institutions, with fiscal policy. Also reflecting huge optimism on the ability to fine-tune everything with fiscal policy.
    • Since MMT thinks the interest rate should be 0, real interest <0, and inflation only a “beyond full employment”-phenomenon, this will encourage massive borrowing and financial instability.
  2. Tymoigne and Wray 2013 still thinks MMT is awesome. But “we have always stressed our roots in the work of Knapp, Keynes, Lerner, Minsky” etc. I’m not sure if they really answer Palleys main points, but at least they all seems to agree on a lot of stuff.
    • The “consolidation hypothesis does not aim at describing current institutional arrangements, rather, it is a theoretical simplification to get to the bottom of the causalities at play in the current monetary system … Under current institutional arrangements, Treasury must receive funds to its account at the central bank before it spends”.
    • Government surplus/deficit is an uninteresting policy target. Bond offerings by the Treasury are central to the stability of the financial system as long as the central bank does not pay interest on reserves.
    • MMT does not want some kind of fine-tuning, instead government should use “structural macroeconomic programs that directly manage the labor force, pricing mechanisms, and investment projects. … All this eliminates problems of credibility.”
    • Credit control more important than interest rate to prevent financial bubbles.
    • “MMT rejects the traditional trade-off between inflation and unemployment.”
  3. Bill Mitchell (2013) writes a long angry post, pointing out that he and other MMT:ers do understand the Phillips curve and more complex aspects of inflation, but that the L-shaped model (inflation explodes beyond full employment) is a good way to start your illustration.
  4. Palley (2014) is still not impressed and repeats some critique. Also, the political economy of ELR is not credible, in comparison to other, economically more sound, solutions. Zero interest rate-parking is anti-Minskian. “An economy can reach full employment with either a budget deficit or surplus, depending on the state of the private sector’s investment – saving balance. However, in a static economy … persistent money financed budget deficits or surpluses would lead to inflation or deflation, absent very special and implausible conditions about money demand.”
  5. Recently, Wren-Lewis (2016) agrees with Palley and Ralph Mussgrave (MMT) agrees with Wren-Lewis in a comment, that MMT is not much new, but mainly a reaction to macromedia. +200 comments.
  6. Brian Romanchuk argues that even if MMT is not new, the term is still useful to discuss differences within (Post Keynesian) Economics. Regarding that last part I think Cullen Roche (paper here) makes a valid point that a lot of MMT is more Marx than Keynes. Also, some MMT comments seems to misunderstand theories on endogenous money. Alexander Douglas says Wren-Levis gets it wrong since MMT is political philosophy, not economics. Maybe Modern Monetary Theory should instead be called Modern Monetary Policy? Or the economics of Abba Lerner, as pointed out by Brad de Long.

Here is some more MMT debate from 2012 and also Lavoie 2011. Labels can make discussions easier, but also add confusion.


3 thoughts on “Notes on the money thinking debate: MMT and the Keynesians

  1. Hi, cheers for this post and engaging with MMT.

    “Since MMT thinks the interest rate should be 0, real interest <0, and inflation only a “beyond full employment”-phenomenon, this will encourage massive borrowing and financial instability."

    MMT suggests asset side regulation in regards to banking. In other words if a loan does not fit certain criteria it becomes a gift, as better than changing the price of lending.

    Here is an article on MMT banking reform:

    Mosler talks about banks all the time since that is his game:

    “MMT rejects the traditional trade-off between inflation and unemployment.”

    Here an explanation of the MMT approach of ensuring full employment and price stability:

    Here’s Bill on the subject in a comment:
    “Dear KongKing (at 2013/11/20 at 15:57)

    You said:

    However, Bill’s conclusion is not proven – he makes no attempt to justify his belief that the true NAIRU is lower, and he makes no suggestions for better ways of estimating NAIRU.

    I have written many academic (peer-reviewed) articles, book chapters and a book on the topic that show in various ways that: (a) the true NAIRU doesn’t exist; (b) that the mainstream estimates of what I call the inflation barrier are biased upwards, sometimes by several percentage points; and (c) that full employment in Australia lies close to an unemployment rate of 2 to 2.5 per cent rather than the official estimates of the NAIRU which are just over 5 per cent.

    I don’t have to repeat my life’s work every time I write a blog.

    best wishes

    Liked by 2 people

  2. Thanks for this blog post regarding Keynesian economics; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.


  3. The main problem is those that critique MMT don’t know MMT well enough to do it. They read about it 15 years ago and don’t realise just how far it has come.

    Take Brad De Long for example from the link he says the following…….

    In my view, the economics of Abba Lerner—what is now called MMT—is not always right: It is not always possible for the government to spend freely to attain full employment, use monetary policy to keep the debt under control, and rely on rising inflation as the only signal needed of whether and when policy needs to be tightened. Why not? Because it is possible that the bond market can get itself into an unsustainable position, in which underlying inflationary pressures are masked until it is too late to rebalance government finances without a financial crisis.

    Yet, MMT say there is no reason to issue bonds at all.

    This Happens all the time because they have never read it properly. MMT gets mis quoted by other economists because they think they know what it stands for but they don’t.

    MMT have just brought out a MMT Textbook to be taught in Universities

    Economists should read this before attempting a critique of MMT. Then let the debate begin. Because using their blogs to do a hit and run with false information just won’t cut it anymore. They are abusing their power as economists and avoiding the debate.

    Krugman has been defeated on a number of occasions on his understanding of banking the record is on youtube ( Steve Keen). Then writes his blog in the New York Times as if it didn’t happen. His blog is a fine example of hit and run economics.

    Liked by 1 person

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