Modern Monetary Theory (MMT)
A heterodox economic framework holding that currency-issuing governments face no financial constraint on spending, only an inflation constraint.
What is Modern Monetary Theory?
Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that holds that a sovereign government with a monopoly on issuing its own non-convertible fiat currency can never involuntarily default on obligations denominated in that currency, because it can always create more money to pay its debts. According to MMT, the real constraint on government spending is not the deficit or debt level, but inflation: governments should spend freely until the economy reaches full employment, using taxes primarily to remove money from circulation and control demand rather than to fund expenditure. MMT has been associated with advocacy for ambitious public programs and job guarantees. Mainstream economists broadly critique MMT for underestimating inflation risks, though the framework gained attention when large pandemic deficits initially failed to generate runaway inflation.
Example
MMT gained mainstream visibility during the debates surrounding the 2020–2021 US stimulus packages. Proponents argued that the US government, as a sovereign currency issuer, faced no financial constraint on issuing trillions in pandemic relief and infrastructure spending. Critics argued this ignored inflation risk. The subsequent surge in CPI inflation to 9.1% in 2022 rekindled the debate: MMT proponents attributed inflation to supply-side disruptions and corporate pricing power, while critics argued it confirmed that monetary financing of fiscal deficits is inherently inflationary above full employment.