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 recent years, 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 Theory 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.
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. 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.
Table of Contents
1. INTRODUCTION
2. IMPORTANT CORNERSTONES OF MODERN MONETARY THEORY
2.1 ORIGINS OF MMT
2.1.1 CHARTALISM
2.1.2 FUNCTIONAL FINANCE
2.1.3 THE KALECKIAN – MODEL
2.2 EXPLANATION OF KEY FEATURES
2.2.1 CURRENCY ISSUERS VS. CURRENCY USERS
2.2.2 THE HOUSEHOLD FALLACY
2.2.3 THE FEDERAL JOB GUARANTEE
3. OVERVIEW OF THE CURRENT SCIENTIFIC CONTROVERSY
4. POLITICAL RELEVANCE
5. APPLIED METHOD OF RESEARCH: THE QUALITATIVE CONTENT ANALYSIS
5.1 PREPARATION OF DATA
5.2 ORGANIZATION OF DATA
5.3 REPORTING OF RESULTS
6. COMPARISON BETWEEN MMT AND OTHER MACROECONOMIC THEORIES
6.1 MONEY
6.1.1 PURPOSE OF MONEY
6.1.2 SUPPLY OF MONEY
6.1.3 DEMAND FOR MONEY
6.2 DEBT
6.2.1 DOMESTIC CURRENCY DEBT
6.2.2 FOREIGN CURRENCY DEBT
6.3 INFLATION
6.3.1 GENERAL INFLATION
6.3.2 HYPERINFLATION
6.3.3 STAGFLATION
6.4 INTEREST RATES
6.4.1 GENERAL INTEREST RATES
6.4.2 NATURAL INTEREST RATES
6.4.3 CROWDING – OUT
6.5 TAXATION
6.6 UNEMPLOYMENT
6.6.1 CYCLICAL UNEMPLOYMENT
6.6.2 NATURAL UNEMPLOYMENT
6.6.2.1 FRICTIONAL UNEMPLOYMENT
6.6.2.2 STRUCTURAL UNEMPLOYMENT
7. CONCLUSION
8. CASE STUDY: MMT IN LATIN AMERICA
9. OUTLOOK
10. BIBLIOGRAPHY
Objectives and Research Themes
This master thesis investigates the resilience of Modern Monetary Theory (MMT) by critically examining its core proposals against fundamental macroeconomic variables. The primary research goal is to identify potential inconsistencies and argumentative shortcomings within the MMT framework by contrasting its standpoints with mainstream economic theory, with a focus on the U.S. economy.
- Foundational theories of MMT (Chartalism, Functional Finance, and the Kaleckian Model).
- Key MMT policy features, including the Federal Job Guarantee and sovereign currency issuance.
- Critical evaluation of macroeconomic components: money, debt, inflation, interest rates, taxation, and unemployment.
- Scientific controversy surrounding MMT and its political influence on recent U.S. policy.
- Case study of MMT-style implementation and economic outcomes in Latin American countries.
Excerpt from the Book
6.4.3 Crowding – Out
As already hinted multiple times prior to this section, the crowding – out dilemma unites many of the vastly contrasting positions of modern monetarists and conventional economists and therefore embodies the discrepancy between the theories as clearly as no other macroeconomic phenomenon. However, the definition and the recognition of the negative consequences of crowding out is mostly similar between the opposing economic theories.
The crowding out of investment describes a situation, where increased governmental spending with the intention of stimulating consumption and investment actually ends up reducing both of them. On the one hand, this occurs because the additional government expenditures increase income of the private sector and the general supply of money within the monetary system which requires an increase of the interest rate in order to restore the market equilibrium according to the IS – LM model. On the other hand, the tendency to finance the additional spending through borrowing forces the government into competition for limited supply of available funds on the market with private investors. As the private sector now has access only to a reduced amount of liquidity, consumption and investment is reduced and borrowing costs move higher which ultimately diminishes the effectiveness of the initial fiscal stimulus.
Summary of Chapters
1. INTRODUCTION: Sets the background of the COVID-19 pandemic and the shift towards massive fiscal stimulus, introducing MMT as a controversial alternative to mainstream economic theory.
2. IMPORTANT CORNERSTONES OF MODERN MONETARY THEORY: Details the origins of MMT, including Chartalism, Functional Finance, and the Kaleckian Model, while explaining key features like the Household Fallacy and the Federal Job Guarantee.
3. OVERVIEW OF THE CURRENT SCIENTIFIC CONTROVERSY: Discusses the polarized reception of MMT among economists and the role of its leading proponents, such as Stephanie Kelton and Warren Mosler.
4. POLITICAL RELEVANCE: Analyzes how MMT’s policy proposals have gained influence within the progressive wing of the Democratic Party in the United States.
5. APPLIED METHOD OF RESEARCH: THE QUALITATIVE CONTENT ANALYSIS: Describes the methodology used to analyze existing literature and categorize MMT’s macroeconomic positions.
6. COMPARISON BETWEEN MMT AND OTHER MACROECONOMIC THEORIES: Provides a systematic, component-by-component critique of MMT regarding money, debt, inflation, interest rates, taxation, and unemployment.
7. CONCLUSION: Synthesizes the critical findings, concluding that MMT lacks the resilience required for effective macroeconomic management and risks causing long-term economic instability.
8. CASE STUDY: MMT IN LATIN AMERICA: Evaluates historical implementations of excessive fiscal policy in Peru, Venezuela, Chile, and Argentina to authenticate the theoretical critiques.
9. OUTLOOK: Discusses the future potential for MMT to influence mainstream U.S. politics and economic policy following the events of 2020 and 2021.
10. BIBLIOGRAPHY: Lists the academic, institutional, and media sources utilized throughout the thesis.
Keywords
Modern Monetary Theory, MMT, Macroeconomics, Fiscal Policy, Monetary Policy, Debt, Inflation, Interest Rates, Taxation, Unemployment, Federal Job Guarantee, Functional Finance, Chartalism, Crowding-out, Economic Growth
Frequently Asked Questions
What is the core focus of this thesis?
The thesis provides a critical evaluation of Modern Monetary Theory (MMT) to determine its resilience and plausibility when compared against established mainstream economic frameworks.
What are the central themes explored?
Key themes include the sustainability of high government debt, the role of central banks, the effectiveness of the federal job guarantee, and the trade-offs between fiscal policy and inflation.
What is the primary goal of the author?
The author aims to reveal potential inconsistencies within MMT and assess whether its proposals can lead to sustainable prosperity or if they risk significant economic instability.
Which scientific methodology is utilized?
The paper employs qualitative content analysis to categorize and compare MMT’s core positions with conventional macroeconomic theories using existing literature.
What is covered in the main section of the paper?
The main section systematically compares MMT against standard economic doctrine across six specific variables: money, debt, inflation, interest rates, taxation, and unemployment.
Which concepts are most characteristic of MMT?
Core concepts include the "Household Fallacy," the distinction between currency issuers and users, and the idea that governments with monetary sovereignty cannot go bankrupt.
How does MMT explain the concept of debt?
MMT argues that sovereign currency issuers, such as the U.S., do not face traditional budgetary constraints and can finance expenditures through money creation, viewing debt primarily as a tool for economic management rather than a burden.
How does the author view the "Federal Job Guarantee"?
The author questions the practicality of the job guarantee, suggesting that it conflicts with the law of scarcity and could negatively impact entrepreneurship and private sector competitiveness.
- Citar trabajo
- Benedikt Hausmann (Autor), 2021, How Resilient is the Modern Monetary Theory? A Scientific Confrontation against Selected Fundamental Statements of Macroeconomic Theories, Múnich, GRIN Verlag, https://www.grin.com/document/1135177
