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.
- 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.
- 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.”
- 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.
- 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.”
- 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.
- 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.