Explaining persistently low interest rates despite large deficits and rising debt has been one of the central challenges of macroeconomists since the end of the Great Recession. This dynamic has led to increasing attention to Modern Monetary Theory (MMT), presented as an alternative to the mainstream macroeconomic way of thinking, in some fiscal policy discussions. Such discussions are at times restricted by a difficulty, expressed by policymakers and economists alike, in understanding MMT’s core principles and how they inform MMT’s views on fiscal policy. MMT suggests that deficit financing can be used without harmful economic effects in circumstances of low inflation rates and low interest rates, conditions that currently exist despite indications that the country is at full employment.
This report surveys the available MMT literature in order to provide a basic understanding of the differences (or lack thereof) between the defining relationships established in MMT and mainstream economics. It then explores how such distinctions may inform policy prescriptions for addressing short- and long-run economic issues, including approaches to federal deficit outcomes and debt management. Included in this analysis are observations of how policy recommendations from MMT and mainstream economics align with current U.S. economic and governance systems.
From the introduction:
Unlike mainstream macroeconomic theory, where consensus has been reached on how core relationships translate into mathematical equations, there is no comparative mathematical statement of MMT. Some academic economists have translated MMT into a mathematical framework, and the explanation of the differences between mainstream and MMT theory are based on those discussions.3 Proponents of MMT do not necessarily accept that framework, however.
Footnote 3 refers to Menzie D. Chinn, Notes on Modern Monetary Theory for Paleo-Keynesians, Spring 2019; and Nick Rowe, “Reverse-Engineering the MMT Model,” A Worthwhile Canadian Initiative (blog), 2011.