Modern Money Theory policymaking praxis and financial and economic stability: a response to critics

Modern Money Theory (MMT) is supposed to generate economic and financial instability through loose fiscal and monetary policies and its ignorance of external constraints. MMT is associated with policies that result in hyperinflation, wastes and financial crises. This chapter notes that MMT does not promote such policies. It does not have a fiscal deficit target or argue for large increases in government spending and private indebtedness. Instead, MMT recognizes that fiscal deficits are normal and a stabilizing force. Central banks should focus on strict financial regulation instead of trying to fine-tuning the economy via interest-rate manipulations. The latter are weak and unreliable means to manage an economy. MMT recognizes potential external constraints, but recommends maximizing the use of domestic resources to meet the public purpose and avoiding the issuance of foreign-denominated public debt. MMT rejects a direct link between fiscal position and exchange rate, an international version of the quantity theory of money.