Modern monetary theory and the frameworks of economic policy

Abstract

Modern money is fiat money. The study presents the main posits of two modern monetary theories (MMT) and the relevance of these ideas for the formulation of economic policy. The pivotal question is who creates money and how. MMT allows governments to boost economic prosperity by creating a budget deficit. MMT doesn’t encourage governments to create deficit or finance the economy by central bank-issued money only, but it holds that zero deficit is not the right goal for economic policy. According to MMT, sovereign governments cannot go bankrupt by creating money for economic prosperity if there is enough free capacity in the country. This is, however, not true for countries which are not issuers of their own currency but only users of other souvereigns’ currency. This calls for more coordinated actions by the monetary and fiscal policy, while fiscal policy is better suited for fine-tuning the economic policy. According to the school of Positive Money, conversely, commercial banks should not be allowed to create money.