Modern Money Theory Research Articles

Not all money is created equal: The concept of a hierarchy of money

Abstract The concept of a hierarchy of money or the idea that a number of instruments constitute money and that they are hierarchically related to one another is relatively recent and yet quite widespread. However, it is argued, that its comprehension differs. The most elaborated cases in which differing treatments of the term can be found are Modern Money Theory (MMT) and the Money View. At first sight, the MMT’s model of money hierarchy focuses on a hierarchy within a specific unit of account whereas the Money View perceives hierarchy not only within an individual unit of account but also across various units of accounts. But, as is shown, differences are more fundamental. It is argued that different comprehension can be explained by the different distinctions between money and credit and concept of monetary sovereignty within each approach rather than the concept of hierarchy itself. The concept of hierarchy acts, in fact, as a framework that ensures consistency in the use of different money instruments on those level.

Sovereign currency and long-term interest rates in advanced economies from 1879 to 2016

ABSTRACT This paper explores the effects of government debts and deficits on long-term interest rates under different international monetary systems from the perspective of monetary sovereignty. The findings of this paper confirm conventional accounts of financial crowding-out and the adverse impact of growing public debt on interest rates among countries under the classical Gold Standard period (1879–1913) and non-sovereign countries under the recent fiat system (1973–2016). By contrast, countries in the Bretton Woods era (1959–1970) and sovereign countries in the contemporary post-Bretton Woods era (1973–2016) do not exhibit such positive debt-interest rates relationships while still showing crowding-out but with much less magnitude. Overall, the results support the Modern Money Theory (MMT) view that the consequence of monetary sovereignty from 1879 to 2016 is to remove, or greatly attenuate, the impact of default risk, fiscal balance, and bond vigilantes on the interest rate.

Fiscal and monetary policy for difficult times: MMT solutions

This article considers the current economic situation from the lens of modern money theory (MMT) and expresses a policy response rooted in post-Keynesian theory and empirical data for the US and the euro area. First, MMT supports targeted deficit spending to promote production. Increasing domestic supply will reduce the prices of goods and energy. Second, MMT advocates for reducing the interest rate to make production more profitable. Third, MMT pushes for a job guarantee and increased unionization to alleviate wage pressure. Fourth, MMT believes in rationing, postponed consumption, patriotic saving, and regulation. Increasing interest rates and limiting government deficit spending are not the only ways to address the post-COVID-19 period. We show there are better ways to restore price stability.

Against the Streams: Alain Parguez and the Theory of the Monetary Circuit

Alain Parguez, together with Bernard Schmitt and Augusto Graziani, is one of the founders of the modern theory of the monetary circuit. Parguez was making his first forays into monetary circuitism in the 1970s, in the years of my formation, when I came in contact with Augusto Graziani. Graziani’s and Parguez’s reflections were independent, but converging. In the article, I consider the parallels and divergences. I will recall some elements of Alain Parguez’s early version of the theory of the monetary circuit. Like Graziani, Parguez was in stark opposition not only to neoclassical theory and ‘bastard’ Keynesianism, but also with a significant part of the post-Keynesian strand. Parguez’s thinking was against the streams (plural): not only the mainstream, but also much of the so-called alternative approaches. In the late Parguez, an undeniable (but limited) connection with Modern Money Theory was emerging. It might seem that over time Parguez reached conclusions dissenting from Graziani, and his own earlier version of the circuit. I will try to give some arguments for my view that this is only partially true, and that some differences are overstated. I will also address some of Parguez’s views on economic policy.

Seismic shifts in economic theory and policy: From the Bernanke Doctrine to Modern Money Theory

This paper evaluates the relationship between monetary and fiscal policy and the relative effectiveness of macroeconomic stabilization through the lens of Modern Money Theory (MMT). We articulate previously-neglected aspects of monetary sovereignty to offer a new interpretation of the Bernanke Doctrine that emerged in the wake of the 2008 Global Financial crisis. This Doctrine validated key MMT precepts and paved the way for fiscal policy activism in response to COVID19. The paper argues that fiscal and monetary policy coordination is not new or rare. It is an intrinsic feature of sovereign monetary regimes, allowing for more effective policy responses to financial crises or pandemics. To the extent that monetary policy is able to stabilize an unstable economy, it is largely due to its fiscal components. This recognition also calls for a rethinking of fiscal policy.

The Politics of Fiscal Responsibility: A Comparative Perspective By Thornton, Tonya E. and F. StevensRedburn, Washington, DC: Westphalia Press. 2021. 166 pp. $22.50. ISBN‐13: 978‐1637238073

Public Budgeting & FinanceEarly View BOOK REVIEW The Politics of Fiscal Responsibility: A Comparative Perspective By Thornton, Tonya E. and F. Stevens Redburn, Washington, DC: Westphalia Press. 2021. 166 pp. $22.50. ISBN-13: 978-1637238073 James W. Douglas, Corresponding Author James W. Douglas [email protected] orcid.org/0000-0003-3804-1337 University of North Carolina at Charlotte, Political Science & Public Administration, Charlotte, North Carolina, USA Correspondence James W. Douglas, University of North Carolina at Charlotte, Political Science & Public Administration, 9201 University City Blvd., Charlotte, NC 28223-0001, USA. Email: [email protected]Search for more papers by this author James W. Douglas, Corresponding Author James W. Douglas [email protected] orcid.org/0000-0003-3804-1337 University of North Carolina at Charlotte, Political Science & Public Administration, Charlotte, North Carolina, USA Correspondence James W. Douglas, University of North Carolina at Charlotte, Political Science & Public Administration, 9201 University City Blvd., Charlotte, NC 28223-0001, USA. Email: [email protected]Search for more papers by this author First published: 23 June 2023 https://doi.org/10.1111/pbaf.12343Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL REFERENCES Akram, Tanweer, and Anupam Das. 2014. “Understanding the Low Yields of the Long-Term Japanese Sovereign Debt.” Journal of Economic Issues 48(2): 331– 40. Akram, Tanweer, and Huiqing Li. 2017. “What Keeps Long-Term U.S. Interest Rates So Low?” Economic Modelling 60: 380– 90. Belz, Sage, Jeffrey Cheng, David Wessel, Daniel Gros, and Angela Capolongo. 2020. What's the ECB Doing in Response to the Covid-19 Crisis? The Hutchins Center on Fiscal and Monetary Policy. (June 4) Washington DC: The Bookings Institution. https://www.brookings.edu/research/whats-the-ecb-doing-in-response-to-the-covid-19-crisis/ Blanchard, Olivier, Alvaro Leandro, and Jeromin Zettelmeyer. 2021. “Redesigning EU Fiscal Rules: From Rules to Standards.” Economic Policy 36(106): 195– 236. https://doi.org/10.1093/epolic/eiab003 Douglas, James W., and Ringa Raudla. 2020. “Who is Afraid of the Big Bad Debt? A Modern Money Theory Perspective on Federal Deficits and Debt.” Public Budgeting & Finance 40(3): 6– 25. George, Justin, and Todd Sandler. 2022. “NATO Defense Demand, Free Riding, and the Russo-Ukrainian War in 2022.” Journal of Industrial and Business Economics 49: 783– 806. https://doi.org/10.1007/s40812-022-00228-y Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth 2nd ed. New York: Palgrave Macmillan. Lerner, Abba P. 1943. “Functional Finance and the Federal Debt.” Social Research 10(1): 38– 51. Mosler, Warren. 2010. The Seven Deadly Innocent Frauds of Economic Policy. St. Croix: Virgin Islands: Valance Company. Nersisyan, Yeva, and L. Randall Wray. 2022. “What's Causing Accelerating Inflation: Pandemic or Policy Response?” Working Paper Series 1003. Levy Economics Institute. Wray, L. Randall. 2019. “MMT and Two Paths to Big Deficits.” Challenge 62(6): 398– 415. https://doi.org/10.1080/05775132.2019.1668646 Wray, L. Randall. 2015. Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems 2nd ed. New York, NY: Palgrave Macmillan. Early ViewOnline Version of Record before inclusion in an issue ReferencesRelatedInformation

AD-AS Analysis from the Perspective of Functional Finance Theory and MMT

Abstract Research background In the past few years, MMT (Modern Money Theory or Modern Monetary Theory) has been increasingly discussed in Japan as well as in the U.S. However, both in the U.S. and Japan, analysis using mathematics is lacking and analysis using IS-LM and AD-AS analysis methods in macroeconomics is almost non-existent. Purpose We present an AD-AS analysis from the perspective of Functional Finance Theory and MMT (Modern Monetary Theory). Research methodology Graphical analyses with some mathematical analyses. Mathematical analyses include graphic analysis using AD and AS curves and calculations to derive equations representing them based on models of consumer and firm behavior. Results Using an overlapping generations model under monopolistic competition we show the following results by calculations and graphical analyses. 1. The budget deficit (including interest payments on government bonds) equals an increase in the savings of consumers from period to period. This result means that the debt-GDP ratio would not diverge to infinity, but would remain at a finite value whether the interest rate of government bonds is larger or smaller than the growth rate. 2. We need a budget deficit (including interest payments) to maintain full employment without inflation under economic growth. However, if the interest rate of government bonds is larger than the growth rate, we need a budget surplus (excluding interest payments) to maintain full employment without inflation. 3. A return to full employment from a recession can be achieved by implementing the appropriate fiscal policies through increased government spending or tax cuts. 4. Excessive government expenditure or an insufficient tax under full employment induces inflation. Novelty This is probably the first AD-AS analysis done from the standpoint of Functional Finance Theory and MMT.

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

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.

Modern money theory: some basics in response to Drumetz/Pfister

This article examines the misconceptions about modern money theory (MMT) put forward by Drumetz/Pfister (2021). The author divides her critique into three categories. First, the Drumetz/Pfister article erroneously indicates that MMT focuses exclusively on the means-of-payment function of money, that it considers money as a pure asset, that it does not distinguish between inside and outside money, and that it does not distinguish between money and the monetary base. Second, Drumetz/Pfister (2021) falsely represent MMT as leaving monetary policy to law and as belittling the impact of quantitative easing. Drumetz/Pfister misunderstand what is meant by government debt being monetized. Third, their article puts forward the incorrect idea that increased government spending could lead to increased long-term interest rates, and that a zero interest rate could supposedly bring about macroeconomic instability and inflation.

MMT, monetary sovereignty and fiscal policy space in Brazil (1999-2019)

There are controversies regarding the applicability of Modern Money Theory (MMT) to emerging countries. In this paper, we shed light on this debate by analyzing the monetary sovereignty and fiscal policy regime in Brazil from 1999 to 2019. An empirical assessment shows the government has a considerable ‘degree’ of monetary sovereignty. However, fiscal rules imposed many restrictions on the State’s capacity to spend, subordinating fiscal policy to austerity. As there are no major macroeconomic constraints to Brazilian monetary sovereignty, it is necessary to change fiscal rules to reorient fiscal policy towards full employment in line with MMT prescriptions.

Weaknesses of MMT as a guide to development policy

Abstract This paper addresses the limitations of Modern Money Theory (MMT) as a guide to development policy. We explore two main questions on this topic: whether policies championed by MMT advocates (i) ought to be implemented in low- and middle-income economies and (ii) can be implemented. In relation to the first question, we argue that the MMT literature mischaracterises the essence of the development challenge for low- and middle-income economies. Our argument is that the chief long-run growth challenge faced by developing countries concerns structural transformation rather than general aggregate demand insufficiency. We use several formal representations of the consumption–investment trade-off in growth theory, found in the Harrod–Domar growth model, the Feldman–Mahalanobis model and Kalecki’s 1963 growth model to illustrate this point. Concerning the second question, we argue that even if MMT had the correct diagnosis of the principal growth challenge faced by developing countries, its chief policy recommendations would likely be counter-productive if implemented outside of select advanced economies. We draw from the international economics literature on currency hierarchy and exchange rate volatility to illustrate this point.

Modern Money Theory in the Tropics: A Reply to Agustin Mario

This paper responds to some inaccuracies on the discussion of our views on Modern Money Theory (MMT), as discussed by Agustin Mario. We believe that while is correct in noting that autonomous spending generates taxes, and fiscal balances are a result, MMT authors overlook the difficulties in pursuing expansionary fiscal policy in the developing countries. These are constrained by the existence of an external constraint that cannot be solved with a flexible exchange rate policy regime. Foreign reserves and capital controls are needed.

On Accumulation of the Budget Deficit: Spirit of MMT Through Mathematical Analysis

It is said that public finance must be balanced at least in the long run. According to the so-called MMT (Modern Money Theory or Modern Monetary Theory) approach, however, this is not true. It is often pointed out that MMT lacks the mathematical analysis used in ordinary economic discussions. The purpose of this paper is to present a brief theoretical and mathematical basis to the backbone of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as maximizing consumer utility through utility functions and budget constraints, and equilibrium between demand and supply of goods under perfect competition with constant returns to scale technology. Using a simple overlapping generations (OLG) model that includes economic growth due to technological progress, we present the following results. The budget deficit equals the increase in people's savings, and the accumulated budget deficit equals people's savings. The budget deficit is a cause and the savings is a consequence, not the other way around. Deficits are created by the government, which determines income, which determines savings. Deficits create savings, not savings finance deficits. Reducing the budget deficit will reduce savings, income, and consumption.

Money Theory as a Foundational Component in Polanyi’s The Great Transformation

In Karl Polanyi’s The Great Transformation (TGT) there are two central narratives: first, he discusses how nineteenth-century society attempted to consciously construct a self- regulating market economy, and, second, how this contradictory epoch created the need for intellectual content that could justify the emerging order via “scientific” legitimacy. Polanyi criticized both, yet what receives little attention is the extent to which his monetary analysis is rooted in what is now known as modern money theory (MMT). The purpose of this article is to elucidate these connections, particularly in their shared rejection of metallism and embrace of economic anthropology to create an alternative framework depicting how “taxes-drive-money,” the mechanism that regulates the value of money and the process by which it is created, and the overlap between their political economies. Thus, we conclude that there is a significant and underappreciated connection between Polanyi and MMT’s respective monetary theories.

Modern Money Theory and International Law

This essay examines an emerging epistemological conjuncture between what might loosely be identified as two (primarily) academic camps: economists subscribing to “modern money theory” (MMT) and international lawyers associated with “critical” traditions within the discipline. For many legal scholars, my sense is that their current experience with MMT varies from “I think I have heard of that before” to “that state theory to money that pushes for a universal job guarantee.” And many progressive economists familiar with MMT have not spent a significant time with the insights and sensibility of critical international law scholarship. My aim here is to explore where there might be fruitful collaboration between these communities.

How excessive endogenous money supply can contribute to global financial crises

Financial crises have become a challenge for sustainable growth, given the frequency and intensity of crisis shocks and their destructive consequences in recent decades. The paper aims to study how the endogenously generated excess money supply can contribute to global financial crises. The creation of money supply is examined from the perspective of the Quantity Theory of Money (QTM) and endogenous money, namely Horizontalism, Structuralism, and Modern Money Theory. Given that prices are not flexible in the short term, increased volatility in the money market prevents a short-term ready balance between money supply and output. The overall result of money supply accommodation can be unpredictable if monetary authorities and commercial banks do not pool their interests, and the money demand volatility becomes extremely high. The study of the correlation between money supply and output allowed distinguishing between neutral countries in the creation of extra liquid assets and countries that can be a potential trigger for excessive money supply volatility. Monitoring the dynamics of M3 and GDP showed that before the significant crisis periods of 1997–1998, 2007–2008, and 2019–2020, the growth of money supply was more than 8%. The established critical level confirms the potential contribution of endogenously created excess money supply to global financial crises.

Why is Bitcoin not Money? A Post-Keynesian view

Bitcoin got increasing popularity and was considered by the public as a great investment due to huge overvaluation in 2017. In parallel, economists and high-level technicians started to advocate the use of bitcoin and other cryptographic currencies as an alternative to national currencies. However, bitcoin is far from being considered as money, so it is hard for a monetary and payment system to emerge based on these technologies. This paper, apart from briefly presenting the Bitcoin System, shows why bitcoin is not money in the light of the Keynesian theory. We use Keynesian essential properties of Money and Modern Money Theory to define money, and to show that cryptographic currencies are not money. We then go back to Keynes' theory of portfolio choice, established in Chapter 17 of the General Theory, to show what bitcoin really is: at most, bitcoin is a perfect virtual commodity, a virtual liquid speculative asset.

The Modern Money Theory in the Time of COVID-19.

This paper critically analyzes the use of Modern Money Theory as a key policy to the economic recovery post covid-19. The gradual evolution of this health crisis and its economic impacts inevitably pushes fiscal and monetary policy in a new direction. In addition to price stability, monetary authorities place a priority for reducing the rate of unemployment for economic and social outcomes.
 In order to stabilize the economy in this unprecedented time, policy makers now face new economics challenges in term of response to the current crisis. Modern Money Theory (MMT) has become relevant in the current crisis, where money supply matters particularly for sustaining full employment as an important condition in the political economy of money. This consideration allowing us to first question the MMT logic and its effectiveness in term of interventionist state that stabilize the economy.
 The core theoretical concept of MMT is that government can finance social public needs with money financed deficits, specifically when the economy is away from the full employment.

Why MMT can’t work

Using a stock-flow consistent ISLM open-economy model, this article shows that, unless very specific country circumstances hold, modern money theory (MMT) cannot work as an effective and sustainable macroeconomic policy program aimed to achieve and maintain full-employment output through persistent money-financed fiscal deficits in economies suffering from Keynesian unemployment or underemployment. Specific country circumstances include cases where the economy enjoys very high policy credibility in the eyes of the international financial markets or issues an international reserve currency; under such circumstances, the adverse outcomes of MMT policy can be prevented and expansionary demand shocks can be effective. Short of such features, an open and internationally highly financially integrated economy that implements MMT policy would either see its money stock grow unsustainably large or would have to set domestic interest rates to levels that would be inconsistent with the policy objective of resource full employment and that would cause instead economic and financial instability. The article explains why ISLM analysis is used to support the arguments developed in it.

Dinheiro como relação social: uma leitura do poder monetário do Estado na MMT

Resumo Este artigo discute as seguintes ideias propostas pela Modern Money Theory (MMT): i) o postulado da moeda como uma criatura do Estado; ii) de que o crescimento econômico pode ser obtido por meio de déficits fiscais; e iii) de que a ação do Estado pode possibilitar o alcance do pleno emprego. Tais ideias implicam significativo papel monetário do Estado, papel que avaliamos à luz de uma concepção marxista do dinheiro como relação social. Destacamos o poder hierarquicamente superior do Estado nesse particular, mas também seus limites, apontando algumas barreiras à aplicação das prescrições da MMT. De um lado, demonstramos que podem haver efeitos substantivos das políticas fiscal e monetária sobre a produção real; por outro, problematizamos a noção de pleno emprego à luz dos limites impostos pelas lutas de classe ao papel do Estado como empregador em última instância.