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FAQ’s on Modern Monetary Theory

This page is a catch all for all things related to answering questions for those curious about Modern Monetary Theory.

What is Modern Monetary Theory?

Modern monetary theory (often, “MMT”) is a descriptive framework of the macroeconomic system. It is applicable to countries that use fiat non-convertible currency with a flexible exchange rate. It proponents are often also proponents of functional finance.

Modern monetary theory shows that countries do not ever face a risk of being unable to pay their debts (the solvency constraint) but may, under certain circumstances, face undesirable inflation if a deficit is run in excess of the needs of the economy (the inflation constraint).


When would a deficit put pressure on inflation?

Since inflation, via fiscal spending, is a function of the amount of slack in an economy to produce more (adding supply) and a function of available currency to purchase that supply (demand), what follows is that spending money into existence be geared towards producing more, so you are increasing both supply and demand near to the point where we can’t produce anymore. So nearing full employment, maxing out factory capabilities, etc…

What is the role of taxation in an MMT economy?

Taxation, under an MMT economy, is no longer recognized as a government revenue stream. The government is the sole issuer of our currency and holds a monopoly on currency issuance. It can print or spend as much currency as it needs to, so the idea of the federal government needing taxes to spend is now obsolete.

The role of taxation then becomes as a way to enhance the private sector and create a more social economy:

“1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.”

Beardsley Ruml, 1946, former Chairman of the Federal Reserve bank of New York

The Natural Rate of Interest is zero!

“The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore
the fed funds rate serves as the ‘base rate’ of interest in the economy. In a state money system with flexible exchange rates running a budget deficit in other
words, under the ‘normal’ conditions or operations of the specified institutional context without government intervention either to pay interest on reserves to offer securities to drain excess reserves to actively support a nonzero, positive interest rate, the natural or normal rate of interest of such a system is zero.”

http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf

Links to Academic works from MMT:

http://alittleecon.wordpress.com/academic-mmt/

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