Modern money theory on fiscal and monetary policies: empirics, theory, and praxis

Abstract

Drumetz/Pfister (2021) make several claims about the inadequacy and fallacy of modern money theory (MMT) and conclude that MMT is nothing more than a political manifesto; there is no theoretical and empirical foundation beneath it. The present paper addresses this last point by focusing on the fiscal and monetary policy aspects of their criticisms. Contrary to what they claim, MMT is backed by a large body of empirical evidence, a rich institutional analysis, and a well-developed theoretical framework (including mathematical models). MMT provides a detailed analysis of the coordination between the fiscal and monetary branches of government, emphasizes that fiscal deficits are a stylized fact, and uses theoretical tools grounded in institutional realities to explain this stylized fact.