How Resilient is the Modern Monetary Theory? A Scientific Confrontation against Selected Fundamental Statements of Macroeconomic Theories

Master's Thesis, 2021

71 Pages, Grade: 1,7


Table of Contents



2.1.3 The Kaleckian - Model




6.2 DEBT
6.4.3 Crowding - Out





Table of Figures

Figure 1: IGM Survey Results Statement A

Figure 2: IGM Survey Results Statement B

Figure 3: Alexandria Ocasio - Cortez Twitter

Figure 4: Debt / GDP U.S. 2010 - 2020

Figure 5: Major Foreign Holders of Treasury Securities

Figure 6: Stephanie Kelton Twitter

Figure 7: US - Unemployment 2020 - 2021

1. Introduction

In the beginning of 2020, the global outbreak of the COVID - 19 pandemic led to a temporary shutdown of most economic activity all around the world which has brought an abrupt hold to the continuous economic growth that has taken place globally during the recovery from the great recession of 2009. Throughout its course, international supply chains that are essential to the well - functioning of multilateral trade in globalized economies threatened to become heavily distorted which caused production and consumption to plummet. This, in turn, led to massive lay - offs of employed workers across all branches around the globe.

When during the great recession quantitative easing was introduced as a permanent feature to the policy mix of all major central banks in order to cope with the economically harmful impact of the crisis, the implications of the COVID - pandemic required different measures than bailouts of faltering financial entities. As a response to the looming crisis, the Trump administration enacted a $2,3 trillion stimulus package to provide a boost to the domestic economy and dampen the negative impacts of the shutdown. This was followed by another stimulus package enacted by the succeeding Biden administration in 2021 which added another $1,8 trillion to the total amount of fiscal stimuli. Ever since, the American economy has shown to be highly responsive to these drastic fiscal policy measures, as GDP growth skyrocketed from minus 31,4 percent in the second quarter of 2020 to an impressive growth of 33,4 percent in quarter three.1

While the short - term beneficial impact of such large financial subsidies on consumption and production is non - debatable, questions regarding the long - term inflationary consequences of funneling this much additional liquidity into the economy may be raised. Even more so, when these subsidies originate from the creation of new money by central banks or are issued through accumulation of government debt. Based on mainstream economic theory, which dominated the scientific discourse for the past decades, such large increases in the money supply ought to be undertaken with great care for inflation, while debt should only be increased as long as it remains sustainable.

In recent years though, a small group of like - minded economists who oppose most of the positions conventional economics have established as the contemporary standard has gained a lot of popularity and relevance within the public discourse, especially since the outbreak of the COVID - 19 pandemic.

They advocate the so called Modern Monetary Theory2 which contests the thought that governments which issue their own currency need to worry about taking on too much debt when undertaking fiscal policy measures because they can always create all the funds they require for clearing their debt by themselves. Within the MMT framework, the accumulation of additional government debt is a permanent feature and government expenditures are not limited by any budgetary constraints but only by the consideration of increasing inflation as a consequence of the excessive fiscal policy the theory recommends.3

Modern monetarists see an implementation of their theory and its proposals perfectly fit not only for overcoming crises such as the COVID - 19 pandemic but also for the initiation of a paradigm shift away from economic theory focused on austerity towards a more human centered approach bringing broad and shared prosperity across all social classes.4 As this proclaimed paradigm shift is a very ambitious goal and MMT's proposals bear some powerful promises, a close investigation of the theory and its most fundamental features is required in order to make an assessment on the credibility of these claims.

This thesis aims to provide an answer to the question how resilient Modern Monetary Theory is when being critically examined with regards to specific macroeconomic variables. Within each respective variable, MMT's standpoints and proposals are then compared with fundamental statements of mainstream economic theory representing the contemporary standard. Due to the fact that most literature dealing with MMT takes perspective from an American point of view, the findings of this thesis will generally apply to the scope of the United States and its economy.

In the beginning of this thesis, a brief introduction to the origins of Modern Monetary Theory and an overview of its most important features is given to provide the reader with a basic understanding of the most fundamental standpoints modern monetarists represent. This is indispensable in enabling the reader's comprehension for the findings resulting from the critical examination of MMT which constitutes the main section of this paper. Furthermore, the relevance of MMT for American politics and the current scientific debate surrounding the theory are highlighted in order to emphasize the controversy that accompanies Modern Monetary Theory within the public discourse today.

In order to systemically make an assessment on MMT's resilience, key positions and proposals of the theory will be investigated with regards to specific macroeconomic components which consist of money, debt, inflation, interest rates, taxation, and unemployment. Among these, significant differences and commonalities between Modern Monetary Theory and fundamental statements of predominant mainstream economic theory will be highlighted. In this context, mainstream economic theory includes conventional textbook economics such as (Neo-) Keynesianism, Monetarism, and the Austrian School of Economics.

The goal of this critical comparison is to reveal possible inconsistencies and argumentative shortcomings within the MMT framework regarding each specific macroeconomic component. The definition of these six components including their subcategories serves as a guideline to systematically classify MMT's key proposals which in turn facilitates the comparison with other macroeconomic theories. Based on the findings resulting from the critical comparison, a rational judgement on MMT's resilience and plausibility will be made in the conclusion.

In order to manifest and authenticate the insights resulting from the critical comparison, a brief case study of a real - life implementation of MMT's proposals and policy measures in Latin America during the past century will be conducted. Based on historic macroeconomic data, the impact of excessive fiscal policy measures in the sense of Modern Monetary Theory on the economies of Peru, Venezuela, Chile, and Argentina will be evaluated.

Finally, an outlook regarding MMT's future development and its potential implementation in American politics and economics will be given which is relevant especially with respect to the shift of political power that has occurred in the United States as a result of the presidential election in 2020.

2. Important Cornerstones of Modern Monetary Theory

2.1 Origins of MMT

2.1.1 Chartalism

One of the first fundamental hypotheses causing the existence of Modern Monetary Theory in its current way dates from the early 20th century and deals with the origin of money. In his work “The State Theory of Money”, published in 1924, Georg Friedrich Knapp builds the foundation for the perception of the emergence of money and currency advocates of Modern Monetary Theory believe in until this day. The so called chartalist approach Knapp established represents an opposition towards the at that time broadly accepted metalist view, which binds a currency's value towards that of its material such as gold or silver.5

According to Knapp, money is a creation from the state and thereby only comes into existence for two reasons. First, the state spends its currency into existence through government expenditures which makes the currency publicly available. Second, the state creates demand for its currency through its willingness to accept the given currency as a payment for imposed tax obligations.6 This hypothesis is a defining characteristic of the relationship between the state and its inhabitants in Modern Monetary Theory. Contrary to the historic approach towards the emergence of money, where the necessity of a generally accepted unit of exchange unifying the people's needs caused the existence of money, MMT pictures a powerful state with the ability to control the public demand for its currency by will through an adjustment of tax obligations. The assumption of an “almighty” government is a phenomenon that will reoccur during the examination of MMT throughout this paper and therefore must be considered early on.

Translating chartalism into today's perspective yields the contemporary approach advocates of Modern Monetary Theory follow with regards to the origin of money. As the state establishes demand for its currency by imposing taxes, its inhabitants then search for paid work in the given currency to pay their tax obligations. In the course of this, the state is also able to meet its demand for services of public needs such as teaching and 7 nursing.

2.1.2 Functional Finance

Arguably the most popular statement Modern Monetary Theory is known for and referenced by public media as well as political discussions is the phrase “deficits do not matter” which refers to the government's ability to perform fiscal policy without the consideration of any financial boundaries. This statement represents a shortened simplification of Abba P. Lerner's theory of Functional Finance from 1943.

Lerner, who also was an advocate of Knapp's State Theory of money, stressed that “fiscal policy (...) shall be undertaken with an eye only to the results of these actions on the economy”7 8. By that, Lerner implies that the actual budgetary outcomes of a government's fiscal policies are not relevant and instead focusses entirely on the immediate economic consequences of these policies.

His reasoning here is that countries which possess control over their own currency, that is to say they control their own central bank unlike eurozone states for example, are not limited by any budgetary constraints as long as they don't borrow heavily in a foreign currency, because they can always create the required funds to service their debt by themselves. Instead, these countries face an inflationary constraint, as said creation of additional liquidity for the financing of policy measures threatens to overheat the economy which in turn may lead to a depreciation of given currency.9 These findings lay the ground for one of the most important elements of today's interpretation of MMT, which is the so-called “Household Fallacy”.

In general, Lerner advises to prefer fiscal policy measures over monetary policy in order to stimulate an economy most efficiently. More precisely, according to Lerner, by repeatedly adjusting taxation and governmental spending with regards to current output and inflation levels, governments are able to achieve their full economic potential while reducing unemployment and inflation to zero.10 Consequently, Functional Finance builds the foundation for the execution of the excessive governmental spending Modern Monetary Theory is broadly known for.

2.1.3 The Kaleckian - Model

The statement that deficits do not matter does summarize Lerner's theory very efficiently, although it does not originate from Functional Finance. The economist who characterized this statement is the lesser-known Marxist economist Michal Kalecki from Poland. With reference to the Keynesian aggregate demand formula, Kalecki proposed that government expenditures are self - financing by claiming that an increase in governmental spending leads to an equally large increase of savings in the private sector.11

Within the private sector he distinguishes between the consumption of capitalists and workers, by which he establishes a two - class mindset inspired by Marxian economics.12 This represents a direct connection between Marx' communist theory and the Kaleckian -model, and consequently, being one of the fundamental principles of MMT, unveils the distinct Marxist roots Modern Monetary Theory is attached to.

Similar to Functional Finance, Kalecki promises growing prosperity through reckless accumulation of national debt. Within the Kaleckian - model, adding deficits to the national debt is a permanent feature of an economic policy that wants to maintain full employment13. Whereas in conventional macroeconomics, governmental spending is generally funded by savings which in turn are accumulated through taxation, and budgetary deficits lower savings, Modern Monetary Theory turns this relation on its head by assuming an increase in the national savings surplus through an expansion of government expenditures. This phenomenon will be examined in more detail in the critical comparison of MMT with conventional macroeconomic theory in the main section of this paper. For now, it is sufficient but at the same time important to consider the relationship between MMT and Marxian economics, especially when turning to the introduction of the main features and the political discussion of MMT in the upcoming chapters of this paper.

2.2 Explanation of Key Features

2.2.1 Currency Issuers vs. Currency Users

At the core of Modern Monetary Theory lies the distinction between the issuer of a currency, which is usually the state, and the user of the given currency which is basically every entity or individual within a monetary system being able to conduct financial transactions.14 This assumption is based on Knapp's State Theory of Money introduced earlier in this chapter, as the state, according to the advocates of MMT, exerts a monopoly over the supply of its currency, which makes it the sole supplier of money within its monetary system.15

An important assessment that is required to be made here is about how much monetary sovereignty the issuer of the given currency possesses. Modern Monetarists define monetary sovereignty as the state's ability “to run its fiscal and monetary policies without fear or painful backlash from financial or foreign exchange markets”16. To put it simply, only countries with high monetary sovereignty are able to perform fiscal policy measures as excessive as they are intended by the Kaleckian - Model and Lerner's Functional Finance. With these theories still being central to the ideas of Modern Monetary Theory today, the importance of monetary sovereignty to the integrity of MMT appears very clearly here.

To gain monetary sovereignty, currency issuers must not convert their currency into commodities or take debt in foreign currency, but only borrow in their own. Examples of countries with high monetary sovereignty are the United Kingdom and Japan, as these countries still have control over their own central bank. In this case, the United States hold exceptional monetary sovereignty due to the US - Dollar 's role as the central currency in the global financial system.17 Countries which have diminished their own monetary sovereignty are not only all states of the eurozone, as these have abandoned their own currencies and thus submitted their power to issue currency to the European central bank, but also countries that borrow large amounts of foreign currencies.18

2.2.2 The Household Fallacy

As already hinted at the introduction of Lerner's Functional Finance, the following core feature represents a combination of multiple theories building the foundation of Modern Monetary Theory which is why it is very essential to the MMT framework. Putting together the elements of Functional Finance, the Kaleckian - Model and monetary sovereignty yields the so-called Household Fallacy, which says that governments with high monetary sovereignty do not have to manage their budgets like a private household would. This means that a sovereign currency issuer is not dependent on collecting tax revenue to be able to bear the expenses of all his fiscal policy expenditures, as those can always be financed through an equally large creation of money.19 Advocates of MMT even go a step further by abolishing the currency issuing government's solvency risk, stating that “the government can't go broke and can't be bankrupt”20.

The previous distinction between currency issuers and currency users is essential to these assumptions, as regular households are unable to perform the spending model currency issuing governments are utilizing, which is spending precedes taxing and borrowing, in short s(TAB).21 Whereas currency users first have to find the funding for their expenses before spending, with private households draining their savings and local governments relying on taxation and borrowing, sovereign currency issuers, following the assumptions of Lerner's Functional Finance, are able to perform excessive fiscal policy with no necessity to collect funds through taxation or borrowing by taking advantage of their infinite currency issuing power.22

Consequently, applying the Kaleckian - Model, MMT not only suggests currency issuing governments with high monetary sovereignty to spend recklessly without the consideration of the budget's funding or the accumulation of debt, it also promises ever -growing prosperity through self - financing governmental expenditures with inflation being the only constraint to look out for. This constellation provides plenty of room for macroeconomic analysis and discussion which is why it will be picked up again later in the main section of this paper during the critical examination of Modern Monetary Theory.

2.2.3 The Federal Job Guarantee

Even though many critics claim that the last feature of Modern Monetary Theory introduced in this chapter is only an optional measure among many others, leading MMT journalists and early developers perceive it as one of the most essential proposals within the MMT framework.23 The basis of this feature consists of the contemporary translation of chartalism and its state money theory stated earlier in this chapter, where public demand for work is said to only exist due to the tax obligations charged by the sovereign currency issuing state.

Advocates of MMT proclaim that currently, institutions like the Federal Reserve underestimate the degree of slack in the economy to a large degree, which means that the American economy falls short of reaching its full economic potential.24

To utilize this slack, they suggest the introduction of a federal job guarantee in order to achieve said full economic potential by offering “a job for every person who wants one”25. Based on voluntary participation, the federal government provides a permanent public option in the labor market centered around local community tasks of public purpose such as gardening or small construction projects.

While the funding for the job guarantee comes from the federal government which is supposed to utilize its monetary sovereignty for the issuance of the required funds, the actual design and distribution of the jobs is executed by local governments and the communities themselves in order to keep bureaucracy at a minimum and to target the benefits of these public services where they are most required.26

Simultaneously, the program establishes a general minimum wage which, according to the advocates of MMT, should amount to $15. With the minimum wage in place, employers in the private sector are bound to at least match this wage as well. Additionally, participants of the program are eligible to receive benefits in the form of healthcare and childcare.27

Modern Monetarists argue that the federal job guarantee serves multiple purposes besides the elimination of involuntary unemployment. On the one hand, the public demand for the program and the number of its participants represents an indicator for the current state of unemployment and the amount of slack in the economy. If the demand for jobs in the program is low, the economy is already operating near full employment. If, however, a substantial amount of people still applies for the job guarantee program, it reveals the presence of massive slack.28

On the other hand, the job guarantee helps to cushion the spikes of growing unemployment during the ups and downs of the business cycle by serving as a parachute for those workers being laid off by their employers. As all participants of the job guarantee program are constantly available for hiring from the private sector, instead of a decline into possible long - term unemployment, a smooth transition from public service back into the private sector is ensured.29

By raising the wages at the bottom, the federal job guarantee also prevents growing inequalities in the distribution of wealth other respective policy measures such as tax cuts possibly promote, which, yet again, highlights the impeccable influence of Marxist theory on MMT.30 With the job guarantee being in place permanently, wages and incomes are secured and therefore the economic fluctuations during the business cycle are less severe. Consequently, according to modern monetarists, the federal job guarantee represents a stabilizer not only for wages, prices, and unemployment, but also for inflation.31

The benefits modern monetarists expect to result from an installment of their job guarantee proposal read very promising as private sector employment is expected to increase by 4,2 million additional jobs and GDP is forecasted to grow by over $500 billion per year. Despite the introduction of the binding minimum wage, inflation is expected to increase merely by 0,74 percent shortly after the implementation of the program which then progressively falls to an increase of 0,09 percent by the end of respective stimulation period.32

3. Overview of the Current Scientific Controversy

Ignited by the policy measures undertaken by the US senate as a response to the COVID - 19 pandemic, Modern Monetary Theory has regained a lot of attention due to policy measures such as the stimulus packages being perceived as closely related to the ideas of MMT. Building on that, many of the advocates of MMT even believe that these enormous stimuli enacted by the U.S. senate coming along with the sheer endless printing of money represent a long - term commitment to the excessive fiscal policy MMT recommends. Among economists, Modern Monetary Theory tends to be either endorsed or dismissed completely because of its extremely opposing standpoints to conventional economic theory. Originating from a very small group of like - minded economists exchanging their thoughts mainly on the internet, MMT has evolved into one of the most controversial economic theories of our time.

Warren Mosler is considered the father of Modern Monetary Theory. Having excelled at foreign currency investments, Mosler published his first paper “Soft Currency Economics” in which he stated the theory that sovereign currency issuing governments cannot default for the very first time. His book “Seven Deadly Innocent Frauds of Economic Policy” from 2010 laid ground to many of the present literature and publications on Modern Monetary Theory, making him one of the most influential personas representing MMT.33

Undoubtedly the most popular modern monetarist who has climbed the ranks among MMT economists to become the face of the theory is Stephanie Kelton. Working as an economic adviser during Bernie Sanders' 2016 presidential campaign, Kelton has quickly gained popularity through her appearances in TV - interviews and publications in famous newspapers.34 In her bestseller book “The Deficit Myth”, which is also subject to this paper on many occasions, she introduces MMT comprehensibly to readers with or without economic background alike.35

Other leading MMT economists are Randall Wray and Scott Fullwiler who are less popular compared to Stephanie Kelton, despite being among the most active publishers of essays and articles on Modern Monetary Theory. Most of their publications on MMT are released by the Levy Economics Institute of Bard College.36

As mentioned above, the constantly growing but still relatively small number of modern monetarists faces fierce opposition from economists of all fields of study. Charging in the very front row in this debate is the well - known New York Times columnist and economics professor Paul Krugman, who has fought multiple argumentative battles with Stephanie Kelton about MMT, specifically with regards to Functional Finance, across various articles as well as social media posts.37

Another elite economist criticizing the implications of MMT's heavy accumulation of debt is Kenneth Rogoff, former chief economist of the International Monetary Fund, who argues that the Federal Reserve cannot act as liberally as Modern Monetarists believe it could due to the United States dependance on foreign buyers of their long - term government bonds.38 Accordingly, Jerome Powell, the chairman of said Federal Reserve, displays his opinion on Modern Monetary Theory much more blatantly, proclaiming during a senate hearing that “the idea that deficits don't matter for countries that can borrow in their own currency I think is just wrong”39.

Despite being known as an investor rather than an economist, Warren Buffet's opinion on economic phenomena are still of broad public interest. Therefore, his rejecting attitude towards Modern Monetary Theory, specifically the reckless accumulation of debt, does not remain unheard, as he states that “we don't need to get into danger zones, and we don't know precisely where they are.”40 Other popular critics of MMT are Thomas Palley, Gregory Mankiw and Anthony P. Mueller.

The impression of broad disapproval for MMT among economists is enhanced by a study conducted by the Initiative on Global Markets of Chicago University, where thirty eight economic experts of their US panel were confronted with two central statements characterizing Modern Monetary Theory and asked to submit their degree of approval. Statement A read “Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt”, and statement B read “Countries that borrow in their own currency can finance as much real government spending as they want by creating money”41.

The resulting responses among this sample of economic experts weighs heavily towards a strong disapproval of the given statements as the figures one and two show.

Figure 1: IGM Survey Results Statement A

Figure 2: IGM Survey Results Statement B

4. Political Relevance

The influence of Marxist theory on the evolution of the components building the foundation of Modern Monetary Theory has already been highlighted in Chapter 2. In their essence, these theories are still very much present in the contemporary interpretation of MMT. Therefore, it does not come as a surprise that the left of the Democratic Party endorse MMT.

Especially features like the federal job guarantee including free medicare for all are advertised heavily by leading representatives of the progressive democratic left with the most popular being congresswoman Alexandria Ocasio - Cortez as she stated that an introduction of MMT policy measures to American politics should be “a larger part of our conversation”42.

Ocasio - Cortez also proposes her “Green New Deal”, which is a policy package that aims to drastically reduce carbon emissions while promoting a sustainable economy that creates additional jobs including family - sustaining wages and health care for all Americans.43 It becomes evident, that her proposal overlaps with many policies advocated by modern monetarists to a large degree. When promoting the Green New Deal on her social media, she uses a strong, rather aggressive language that contains phrases which are very similar to those stated by many modern monetarists.44

Abbildung in dieser Leseprobe nicht enthalten

The Green New Deal decarbonizes our economy while ensuring we leave no community behind, incl job transitions for miners, labor rights, healthcare & wages.

Calling the consideration of working people in climate policy a "distraction" is what is truly unsustainable + unrealistic.

Tweet übersetzen

Abbildung in dieser Leseprobe nicht enthalten


Figure 3: Alexandria Ocasio - Cortez Twitter

Regarding the funding of populist features such as free medicare for all, Ocasio - Cortez suggests a reduction of military spending along with a drastic increase of taxation on the rich.45

However, the republican party as well as the rather conservative members of the democratic party yield a rejecting position towards the policy measures MMT proposes which is why its relevance has been heavily undermined so far.46 This was until the COVID - 19 pandemic struck the global economy, making measures in the sense of modern monetarists a temporary necessity, hence leading to a major boost of MMT's political relevance and popularity.

As already hinted in the introduction, the inauguration of Joseph Biden as the 46th president of the United States and the simultaneous attainment of the majority of seats in the senate by the democratic party has improved the chances of an impact of modern monetary proposals on American politics drastically. Whereas the former republican Trump administration introduced tax cuts as one of its very first measures while decreasing governmental expenditures in order to reduce governmental debt, Joe Biden has announced further stimuli with a volume of around 2 billion US Dollars to further battle the economic consequences of the COVID - 19 pandemic.47 The implications of this shift of political power for MMT's future development will be discussed further in detail in the outlook of this thesis.

Before its recent rise in popularity, MMT was represented politically only by a very small number of people. Stephanie Kelton, the most popular advocate of Modern Monetary Theory, was the economic adviser to Bernie Sanders during his 2016 presential campaign. Sanders himself is known for his liberal views, which overlap with many of the policies MMT proposes. Consequently, there are many modern monetarists among his allegiance to this day. Despite his failed attempt for presidency in 2016 and his forfeit to Joe Biden during the 2020 presidential race, the ideals of MMT are still present among many members of the democratic party.

5. Applied Method of Research: The Qualitative Content Analysis

Due to the apparent lack of appropriate quantitative data, most of the literature dealing with Modern Monetary Theory merely takes a qualitative approach towards the implications of MMT's proposals. Given these conditions, the qualitative content analysis represents the most adequate method of research for finding a sufficient answer to the initially imposed research question.

The qualitative content analysis is a category - based and research question-oriented approach.48 It can be applied in either an inductive or deductive way which distinguishes in how the gathered data is organized. The deductive content analysis categorizes the data in a matrix enabling a clear and well - structured comparison of the given data samples.49 The structure of the qualitative content analysis consists of the three main phases preparation of data, organization of data and reporting of results.50 With regards to this paper, these three phases are described in detail below.

5.1 Preparation of data

In the preparation phase, it is first required to collect suitable data for the performance of the qualitative content analysis. What follows is making sense of given data and choosing a unit of analysis.51 In case of this paper, suitable data not only consists of literature dealing with Modern Monetary Theory and its underlying theories along with all its receptions throughout economic journals, newspapers, and social media but also literature regarding conventional economics, as it provides the basis for the critical comparison in the later phases of the qualitative content analysis. Most of the literature has been gathered through online research using institutes such as the Levy Economics Institute of Bard College in New York, the Mises Institute in Alabama or the International Monetary Fund as a guideline. After reviewing and structuring the literature, various categories of macroeconomic variables were formulated as unit of analysis which is essential to the following organization phase.

5.2 Organization of Data

For this particular research question, the deductive way is the most sufficient one for the qualitative content analysis with the construction of the categorization matrix being the central component in this approach. The categories consist of the macroeconomic components money, debt, inflation, interest rates, taxation and unemployment. Among these variables, distinct differences and similarities between Modern Monetary Theory and the other conventional macroeconomic theories were systematically identified and recorded. The resulting matrix can be found in the appendix.

5.3 Reporting of Results

The findings resulting from the juxtaposition in form of the matrix constitute the main section of this paper. The underlying chapters of the comparison between Modern Monetary Theory and the conventional macroeconomic theories derive directly from the categories of the matrix. Within these chapters, the views of Modern Monetary Theory will be put into contrast with each respective macroeconomic theory dominating the contemporary consensus regarding the given category. In the course of this, the goal is to unveil possible inconsistencies or argumentative shortcomings concerning the positions and proposals of modern monetarists. This will enable the answering of the initially imposed research question of this paper in the afterwards following conclusion, where the gathered findings will be once again summarized and structured.

6. Comparison between MMT and Other Macroeconomic Theories

This critical comparison of Modern Monetary Theory with conventional macroeconomic theory constitutes the main section of this paper. Within each chapter, the structure generally applies to the following pattern.

First, MMT's key positions and proposals regarding the given component are highlighted. These are then directly confronted with fundamental statements of each respective macroeconomic theory representing the scientific standard of the given macroeconomic variable. Afterwards, significant differences between the opposing theories are underlined and explained in order to discover possible inconsistencies of the reasoning behind MMT's proposals regarding the given component.


1 U.S. Bureau of Economic Analysis (2021). Gross Domestic Product (Third Estimate), Corporate Profits, and GDP by Industry, Fourth Quarter and Year 2020. U.S Department of Commerce

2 In the following primarily referred to as MMT.

3 Cf. Nersisyan, Y. Wray, R. (2020). Are We All MMTers Now? Not so Fast. Levy Institute of Bard College

4 Cf. Kelton, Stephanie: The Deficit Myth. Modern Monetary Theory and How to Build a Better Economy. Published by John Murray, 2020. p. 263

5 Cf. Knapp, Georg Friedrich (1924). The State Theory of Money. Fourth Edition. p. 4 ff.

6 Ibid. p. 56 ff.

7 Cf. Kelton (2020). p.31

8 Lerner, Abba P. (1943). Functional Finance and the Federal Debt. Social Research Vol. 10, No. 1; published by the John Hopkins University Press. p.39

9 Cf. Krugman, Paul (2019). What's Wrong with Functional Finance? (Wonkish). New York Times

10 Cf. Lerner, A. (1943). p.41

11 Cf. Kalecki, Michal: Essays in Theory of Economic Fluctuations. Published by George Allen & Unwin Brothers Ltd. London, (1939). p. 76

12 Ibid. p. 77

13 Cf. Mamica, Lukasz; Toporowski, Jan (2015). Michal Kalecki in the 21st Century. Springer. p. 148 ff.

14 Cf. Kelton, S. (2020). p. 18

15 Cf. Ibid. p. 17

16 Ibid. p. 142

17 Cf. Ibid. p. 19

18 Cf. Ibid. p. 142

19 Cf. Ibid. p. 21

20 Mosler, Warren. (2010). Seven Deadly Innocent Frauds of Economic Policy. p. 17

21 Cf. Kelton, S. (2020). P. 23

22 Cf. Mosler, W. (2010) p. 13, p. 22

23 Cf. Wray, Randall L. (2020). The ‘Kansas City' Approach to Modern Money Theory. Levy Economics Institute of Bard College, Working Paper No.961, p. 31

24 Cf. Kelton, S. (2020). p. 59

25 Ibid. p. 245

26 Cf. Wray et al. (2018). Public Service Employment: A Path to Full Employment. Levy Economics Institute p. 35

27 Cf. Wray, R. (2020) p. 30

28 Cf. Kelton, S. (2020). p. 64

29 Cf. Ibid. p. 66

30 Cf. Wray, R. (2020). p. 32

31 Cf. Kelton, S. (2020). p. 67

32 Cf. Wray, R.; Dantas, F; Fullwiler, S; Kelton, S. (2018). Public Service Employment: A Path to Full Employment. Levy Economics Institute, p. 1

33 For more information on Warren Mosler, visit:

34 An interview with Stephanie Kelton for CNBC from 2019 is one of the most popular MMT videos on See:

35 For more information on Stephanie Kelton, visit:

36 For further reading, see:

37 Over a series of tweets, Paul Krugman and Stephanie Kelton debate about positions modern monetarists represent with regards to various macroeconomic components. In his last tweet, Krugman calls Kelton's reasoning “just a mess”. For more details, see:

38 Cf. Rogoff, Kenneth (2019). Modern Monetary Nonsense. Project Syndicate

39 Cox, Jeff (2019). Powell says economic theory of unlimited borrowing supported by Ocasio - Cortez is just ‘wrong'. CNBC

40 Chiglinsky, K. Dmitrieva, K. (2019). Buffett Joins Scorn of Modern Monetary Theory and ‘Danger Zones'. Bloomberg

41 IGM Economic Experts Panel survey on MMT

42 Relman, Eliza (2019). Alexandra Ocasio - Cortez says the theory that deficit spending is good for the economy should ‘absolutely' be part of the conversation.

43 Cf. Kurtzleben, Danielle (2019). Rep. Alexandria Ocasio - Cortez Releases Green New Deal Outline. National Public Radio

44 In another Tweet, Ocasio - Cortez accuses the Republican Party of spreading lies about her Green New Deal and states that “It's okay to call the GOP out on those lies just as we call them out on all their other lies.” For more, see:

45 Cf. Choi, Matthew (2019). Ocasio - Cortez floats 70 percent tax on the super wealthy to fund Green New Deal.

46 Cf. Dmitrevia, Katia (2019). Senate has a Duty to Denounce MMT, Republicans Say in Resolution. Bloomberg

47 Pramuk, J. (2021). Biden signs $1.9 trillion Covid relief bill, clearing way for stimulus checks, vaccine aid. CNBC

48 Cf. Mayring, Phillip (2019). Qualitative Content Analysis: Demarcation, Varieties, Developments. Forum: Qualitative Social Research Vol. 20, No. 3, Art. 16, p. 3

49 Cf. Elo et al. (2014). Qualitative Content Analysis: A Focus on Trustworthiness. SAGE journals. p.2

50 Cf. Ibid. p. 1

51 Cf. Ibid. p. 2

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How Resilient is the Modern Monetary Theory? A Scientific Confrontation against Selected Fundamental Statements of Macroeconomic Theories
University of Applied Sciences Ludwigshafen
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Modern Monetary Theory, MMT, monetary policy, Money
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Benedikt Hausmann (Author), 2021, How Resilient is the Modern Monetary Theory? A Scientific Confrontation against Selected Fundamental Statements of Macroeconomic Theories, Munich, GRIN Verlag,


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