ET Explains: Modern monetary theory
Modern Monetary Theory (MMT) was the panacea for all economic ills. Now there's hardly a murmur.
How a surge in inflation across the world following the post COVID fiscal stimulus has poured cold water on the hopes of the MMT lobby.
What is MMT?
MMT which gained mainstream attention in the late eighties and early nineties is based on the premise that governments should be allowed to spend by printing currencies without imposing any constraints or be concerned about fiscal deficit to fund growth and achieve economic goal like full employment and price stability. This is in contrast to traditional fiscal policy, which is based on the belief that governments should only spend and tax when necessary to balance the budget.
The proponents of MMT argue that governments can print money to fund spending without causing inflation, as long as they manage the money supply and keep the inflation rate low.
Which countries have adopted MMT?
Though economies have not fully adopted MMT as a full-fledged policy, many economies have temporarily used MMT during the COVID-19 induced lock down to revive demand and economic activity when the governments across the globe including the USA gave large doles to its citizens to stimulate demand.
Are there any success cases of MMT?
Research papers point that MMT economists have used Japan as an example of a country that demonstrates that high deficits and debt do not lead to insolvency, high interest rates, or inflation, though Japanese policy makers do not agree.
