Abstract
In the November/December 2021 issue of Intereconomics, Françoise Drumetz and Christian Pfister examine Modern Monetary Theory (MMT) and approach it from the policy consequences that would follow. This paper is a reply to Drumetz and Pfister. It restates the core of MMT and offers some suggestions for central banks. Theories are explanations of what we see, and MMT describes money creation and destruction. Hence, MMT cannot be and is not a political manifesto. In contrast to most other theories of money, MMT is falsifiable in its core statements, which are based on a balance sheet approach to macroeconomics. Since many central banks already educate the public about the creation of modern money through bank lending, it would be most welcome if they would do the same for the creation of modern money through government spending. Here, MMT and central bankers can find common ground to move forward and leave the theory of loanable funds and that of the money multiplier behind.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Armstrong, P. and W. Mosler (2019, 24 February), A Discussion of Central Bank Operations and Interest Rate Policy, Gower Initiative for Modern Monetary Studies.
Armstrong, P. and W. Mosler (2020, 14 November), Weimar Republic Hyperinflation through a Modern Monetary Theory Lens, Gower Initiative for Modern Monetary Studies.
Beveridge, W. H. (2015) [1944], Full Employment in a Free Society (Works of William H. Beveridge): A Report, Routledge.
Bloomberg, (2019a), Draghi Says ECB Should Examine New Ideas Like MMT.
Bloomberg (2019b), Lagarde says MMT is no panacea but may help fight deflation.
Bobeica, E., M. Ciccarelli and I. Vansteenkiste (2019), The link between labor cost and price inflation in the euro area, ECB Working Paper Series, 2235.
Bundesbank (2017), The role of banks, non-banks and the central bank in the money creation process, Deutsche Bundesbank Monthly Report, April 2017, 13–33.
Carrión Álvarez, M. and D. Ehnts (2016), Samuelson and Davidson on ergodicity: A reformulation, Journal of Post Keynesian Economics, 39(1), 1–16.
Drumetz, F. and C. Pfister (2021a), Modern Monetary Theory: A Wrong Compass for Decision-Making, Intereconomics, 56(6), 355–361, https://www.intereconomics.eu/contents/year/2021/number/6/article/modern-monetary-theory-a-wrong-compass-for-decision-making.html (25 March 2022).
Drumetz, F. and C. Pfister (2021b), The Meaning of MMT, Banque de France Working Paper, 833.
ECB (2021), How quantitative easing works, https://www.ecb.europa.eu/explainers/show-me/html/app_infographic.en.html (5 January 2022).
Ehnts, D. (2014), A simple macroeconomic model of a currency union with endogenous money and saving-investment imbalances, International Journal of Pluralism and Economics Education, 5(3), 279–297.
Ehnts, D. (2016), Modern Monetary Theory and European macroeconomics, Routledge.
Ehnts, D. (2019, 4 June), Modern monetary theory: a simple macroeconomic model, Social Europe.
Ehnts, D. (2020a), The fiscal-monetary nexus of Germany, IPE Working Paper, 138/2020.
Ehnts, D. (2020b), The unexpected victory of modern monetary theory and its consequences, International Journal of Pluralism and Economics Education, 11(3), 293–295.
Ehnts, D. (2022), The meaning of MMT: a reply, EDI Working Paper Series, 03.
Ehnts, D. and M. Höfgen (2019), Modern Monetary Theory and the Public Purpose, American Review of Political Economy, 15(1), 1–12.
Ehnts, D. und M. Paetz (2021), COVID-19 and its economic consequences for the Euro Area, Eurasian Economic Review, 11(2), 227–249.
Ehnts, D. and A. Voldsgaard (2020), A Paradigm Lost, a Paradigm Regained — A Reply to Druedahl on Modern Monetary Theory.
Fullwiler, S. (2020), When the Interest Rate on the National Debt Is a Policy Variable (and “Printing Money” Does Not Apply), Public Budgeting & Finance, 40(3), 72–94.
Godley, W. and M. Lavoie (2006), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, Palgrave Macmillan.
Greitens, J. (2019), Karl Helfferich und Rudolf Hilferding über Georg Friedrich Knapps “Staatliche Theorie des Geldes”: Geldtheorien zur Zeit der Hyperinflation von 1923, IBF Paper Series, 04–19.
Ihrig, J., G. C. Weinbach and S. A. Wolla (2021), Teaching the Linkage Between Banks and the Fed: R.I.P. Money Multiplier, Page One Economics Newsletter, Federal Reserve Bank of St. Louis.
Kelton (neé Bell), S. (2000), Do Taxes and Bonds Finance Government Spending?, Journal of Economic Issues, 34(3), 603–620.
Kelton, S. (2019, 4 March), The Clock Runs Down on Mainstream Keynesianism, Bloomberg Opinion.
Kelton, S. (2020), The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, John Murray.
Krugman, P. (2021, 21 May), Krugman Wonks Out: What We Talk About When We Talk About Money, New York Times.
Lerner, A. (1947), Money as a Creature of the State, The American Economic Review, 37(2), 312–317.
Levey, S. (2021), Modeling Monopoly Money: Government as the Source of the Price Level and Unemployment, Levy Economics Institute Working Paper, 992.
Mackintosh, J. (2021, 21 November), Modern Monetary Theory Isn’t the Future. It’s Here Now, The Wall Street Journal.
McLeay, M., A. Radia and R. Thomas (2014), Money creation in the modern economy, BoE Quarterly Bulletin, 2014 Q1, 14–27.
Mitchell, W. (2019), A response to Greg Mankiw — Part 1, Bill Mitchell — Modern Monetary Theory Blog.
Mitchell, W., M. Watt and L. R. Wray (2019), Macroeconomics, Red Globe Press.
Mosler, W. (1995), Soft Currency Economics.
Mosler, W. (1997), Full Employment and Price Stability, Journal of Post Keynesian Economics, 20(2), 167–182.
Nersisyan, Y. and L. R. Wray (2019), How to Pay for the Green New Deal, Levy Economics Institute Working Paper, 931.
New York Times (2021), Modern Monetary Theory Has a New Friend in Congress, https://www.nytimes.com/2021/09/01/opinion/mmt-johnyarmuth.html (5 January 2022).
Reuters (2020, 19 November), ECB can’t go bankrupt even it suffers losses.
Sheard, P. (2013), Repeat After Me: Banks Cannot and Do Not Lend Out Reserves, S&P Ratings Direct Economic Research, 1–15.
Tcherneva, P. (2002), Monopoly Money: The State as a Price Setter, Oeconomicus, V, 124–143.
Tcherneva, P. (2020), The Case for a Job Guarantee, Polity Press.
Tymoigne, É. (2014), Modern Money Theory and interrelations between the treasury and the central bank: The case of the United States, Levy Economics Institute Working Paper, 788.
Wray, L. R. and Y. Nersisyan (2021), Has Japan Been Following Modern Money Theory Without Recognizing It? No! And Yes, Levy Economics Institute Working Paper, 985.
Author information
Authors and Affiliations
Additional information
Dirk Ehnts, Hochschule Magdeburg-Stendal, Germany.
Rights and permissions
This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/).
Open Access funding provided by ZBW — Leibniz Information Centre for Economics.