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Journal number 3 ∘ Malkhaz Chikobava Nazira Kakulia Tea Lazarashvili
Debate on the Basic Principles of Modern Monetary Theory

journal N3 2025

DOI: 10.52340/ekonomisti.2025.03.02

Abstract: The conceptual and analytical framework of Modern Monetary Theory (MMT) is based on the principles of functional finance and the theory of money known as Chartism. When applied to specific macroeconomic analysis, it is based on prevailing institutional practices. Typically, these methods assume constraints on the behavior of the central bank and/or the treasury imposed by political and ideological processes, which are often mistakenly interpreted as substantive (involuntary) constraints. MMT removes this ideological veil, revealing the inner workings of modern monetary economies.

This paper attempts to provide an MMT-based response to the orthodox critics of the basic assumptions of MMT. It also presents some key insights developed by MMT that will help students (and others) rethink their knowledge of the functioning of modern advanced capitalist economies. It should be emphasized that these ideas are not unique to MMT and are based on a large heterodox literature. 

Key terms: central bank, government, treasury, commercial banks, budget expenditures, emission financing, inflation, orthodox and heterodox paradigms, full employment, emission financing. 

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Our goal is to draw attention to critical opinions about modern monetary theory, which may give an inexperienced reader an incorrect, incomplete idea of the theoretical premises of MMT and the practical recommendations offered by scholars following this direction.

When discussing MMT, it is necessary to distinguish between its methodology (balance sheet analysis and the apparatus of modern monetary systems) and its ideology (recommendations to politicians about what they should do). It is difficult to disagree with MMT\\\\\\\\'s description of the modern (fiat) monetary system. However, it is difficult to draw any categorical conclusions for economic policy based on it. We may agree that many MMT adherents are left-wing, but this does not mean that the theory itself is “left-wing”.

Perhaps the desire to focus on orthodox ideology prevents a certain group of academic economists from presenting the foundations and methodology of MMT in an unbiased manner. In order not to be unfounded, let us turn to the main statements: In order not to be unfounded, let us turn to the main arguments of MMT critics:

In a deflationary-recessionary environment, the popularization of MMT offers us a “scientific” justification for why central banks should buy government debt, and finance ministries should increase its issuance.

The unorthodox monetary policy measures that we have seen in recent decades indicate exactly this. But in order to move on to drawing conclusions from MMT, we need to properly understand how the modern financial system works at the operational level. It is not necessary for the central bank to buy government debt. The result of such purchases is excess reserves on bank balance sheets, shorter duration of financial assets in private sector portfolios, lower long-term interest rates, and nothing more. The same can be achieved by issuing shorter-term government debt obligations or simply not issuing them at all, but by directly crediting government accounts with the amount of the budget deficit. The primary concern is the government’s desire to increase spending and allow a budget deficit, not the method of financing it.

Then, supporters of the orthodox paradigm cite the main provisions of MMT:

MMT is based on several assumptions. Its supporters assume that the government can issue government bonds and also cover them at the expense of monetary emission, as a result of which a default on the government debt is impossible. First of all, this applies to sovereign economies whose public debt is denominated in national currency...

This phrase contains the correct reasoning from MMT, but with one caveat: monetary emission is one of the options for financing budget deficits or repaying debt, but not mandatory. Public debt, like any debt, can be refinanced in a modern monetary system. At the same time, the rate for a sovereign borrower cannot differ significantly from the one targeted by the central bank within the framework of its monetary policy. Excess reserves and money that are created as a result of emission become the same debt on which the central bank and commercial banks pay interest. After that, critics of MMT note the following:

... The currency itself is a reserve. In other words, the economies of other countries create a demand for the national currency, which mitigates the consequences of excess money emission. An economy with a reserve currency can cover its government spending by financing budget deficit emissions.

Critics of MMT here repeat the well-known thesis that MMT suffers from “Americanocentrism”, describing the situation exclusively from the point of view of the leading world powers, namely the United States. Despite the importance and uniqueness of the provision regarding the possibility of issuing a world reserve currency, this is only an additional feature of a particular monetary system, which is not important for the central argument about the impossibility of default.

The demand of other countries for the national currency or debt obligations is reflected in the balance of payments, but does not affect the way in which a sovereign state issues debt or money - by issuing it or by issuing government bonds. From the point of view of the device of the modern monetary system, the issue of money by the central bank occurs either by directly crediting government accounts, or by exchanging new money for other previously created financial assets. In both cases, the issue expands excess liquidity in banks, the absorption of which occurs within the framework of the central bank\\\\\\\\'s normal liquidity management operations (liquidity does not expand the ability of banks to lend to the economy, which means that it cannot in itself create inflationary or other problems in the economy). According to critics of MMT, “...something like this is impossible in developing countries, since the emission financing of budget expenditures leads to hyperinflation and depreciation of the national currency.”

This point requires clarification. Where exactly is the threshold beyond which the emission financing of expenditures threatens hyperinflation? Perhaps it is 1%, 2%, 5% of GDP? How does “emission financing” differ from the purchases of government bonds by central banks, which we are now seeing? Of course, it should be noted that hyperinflation is a rather rare phenomenon in recent economic history. Moreover, in all cases, its root causes were not emission financing as such, but all kinds of shocks on the supply side, which were associated with changes in the world economy, the consequences of wars, the collapse of states, etc.

The monetary systems of developing countries that have their own currencies with a floating exchange rate operate on the same principles as countries with reserve currencies. For them, the method of financing the budget deficit in the national currency does not matter. However, developing economies have more restrictions on the implementation of budgetary policy in terms of non-inflationary spending growth and budget deficits. However, this is true for any economy from the point of view of MMT. The size of the deficit does not matter from a financial point of view, but it matters from the point of view of the availability of real resources. In developing countries, where the population wants to save not only in national but also in reserve currencies, export potential is also important, serving both to meet import needs and to generate savings.

According to critics, the distinctive feature of MMT is the rejection of independent monetary policy and the government\\\\\\\\'s orientation towards ensuring full employment in the economy.

It can hardly be said that MMT rejects the independent monetary policy of the central bank. Moreover, there is a question of priorities - MMT argues that the main goals of economic development should be full employment, sustainable economic growth, accompanied by the fulfillment of other socially important tasks (for example, environmental protection). In this situation, the presence of people who are not involved in labor activity is a net missed opportunity that reduces total output in the national economy. In addition, a significant number of unemployed people can put pressure on the labor market by reducing the level of wages and, accordingly, reduce the share of wages in the structure of the primary distribution of national income. Post-Keynesian economists regularly point to this shift in the balance (in favor of profits) as one of the most important reasons for the decline in economic growth rates in recent decades. In addition, the tightrope between fiscal and monetary power creates unnecessary difficulties in state management.

Critics argue that ...taxes in MMT are needed only to combat inflation.

MMT implicitly recognizes that a financially sovereign state does not need taxes to finance its own spending, since it can technically always issue additional currency and carry out deficit spending regardless of how much tax has been collected in the past.

However, taxes have two important functions. Among them, one that is rightly noted by critics of MMT is the fight against inflation, even though the process of collecting taxes is nothing more than the destruction of currencies on one account (private) by re-creating them on another (state) account. But the second, unnamed function, which is much more important, is the ability to manage the economy in a non-inflationary way with available resources, including labor resources. Given how much the representatives of the post-Keynesian school have written about the negative consequences of growing inequality, the concentration of capital in the financial sector, speculation and financial machinations over the past 30-40 years, the second function cannot be discounted. In short, taxes play an important role in the government\\\\\\\\'s countercyclical policy.

We are far from the opinion that orthodox economists are deliberately manipulating the data and ascribing to MMT supporters conclusions that do not in any way follow from the main theoretical foundations of this trend.

We assume that there is some conflict of versions. The point is that the popularity of MMT is associated only with its citation by well-known politicians. For more than a decade, this trend has been gaining supporters on the Internet - on various forums, private blogs and other discussion platforms. Of course, a side effect of such a distribution model has been the emergence of enthusiasts who, although they call themselves MMT supporters, are not professional economists, central bankers and financiers. Amateurs can allow themselves to judge incorrectly and give simplified illustrations.

However, the responsibility that lies with real professionals requires a respectful approach to the sources being analyzed. In this regard, the most reliable, complete set of MMT concepts (including the post-Keynesian school of thought generally associated with it) is the recently published textbook Macroeconomics, R. Ray, B. Mitchell, B. Watts. A more accessible and free option is the Primer on MMT, which Randall Ray has completed and published on the Internet on a non-commercial basis. Of course, getting acquainted with this material can take considerable time and effort, but otherwise there is a significant risk of arguing with an inauthentic theory. The same applies to any other direction of economic thought, including MMT, which just a few years ago was called a “marginal, unknown, uninfluential theory.”