What's wrong with Modern Money Theory: macro and political economic restraints on deficit-financed fiscal policy

Thomas Palley

Review of Keynesian Economics, 2020, vol. 8, issue 4, 472–493

Abstract: The essential claim of Modern Money Theory (MMT) is sovereign currency issuing governments, with flexible exchange rates and without foreign currency debt, are financially unconstrained. This paper analyses the macroeconomic arguments behind that claim and shows they are suspect. MMT underestimates the economic costs and exaggerates the capabilities of deficit-financed fiscal policy. Those analytic shortcomings render it poor economics. However, MMT's claim that sovereign governments are financially unconstrained is proving a popular political polemic. That is because current distressed economic conditions have generated political resistance to fiscal austerity, and MMT fits the moment by countering the neoliberal polemic that government lacks fiscal space because it is akin to a household.

Keywords: Modern Money Theory (MMT); budget deficits; job guarantee program (search for similar items in EconPapers)
JEL-codes: E00 E12 E40 E58 E60 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:elg:rokejn:v:8:y:2020:i:4:p472-493

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