Modern Monetary Theory
Also called: MMT · Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
Modern Monetary Theory (MMT) holds that a government issuing its own currency can never be forced to default on debt in that currency, because it can always create the money to pay. Its thinkers are Warren Mosler, L. Randall Wray and Stephanie Kelton. In their view, the real limit on government spending is inflation, not solvency (the ability to pay debts). A government should stop spending more only when the economy's real resources are fully used and prices start rising. MMT is a heterodox view, which means it lies outside mainstream economics.
Example
MMT fits India poorly, for four reasons:
- the FRBM Act (2003) sets targets for the fiscal deficit (the gap between government spending and income) and for debt;
- the rupee is not a reserve currency, so heavy money creation could weaken it;
- India has a history of high inflation;
- large deficits could lead to rating downgrades and flight of foreign capital.
Don't confuse with
- Monetarism: Friedman's view that money-supply growth drives inflation, so money should grow at a steady, fixed rate. MMT is relaxed about deficits as long as inflation stays low.