What is the MMT theory of inflation?

Patrick Horan and I have a new piece over at The Bridge, which criticizes the increasingly popular “Modern Monetary Theory” of inflation:

Market monetarists argue that nominal GDP (total dollar spending on all goods and services in the economy) is the best way to determine whether monetary policy is too tight (leading to a recession) or too loose (leading to high inflation). During the recovery from the Great Recession, nominal GDP growth has averaged only four percent per year, which largely explains the low inflation rate.  The 1980s was also a period of expansionary fiscal policy and rising government debt, and inflation also fell during this period, as the Fed reduced the growth rate of the money supply.  And contrary to the predictions of MMT, the expansionary monetary policy of the 1960s and 1970s pushed inflation sharply higher, even though government spending and deficits were not unusually large.  While the market monetarist model (as well as some other conventional models) can explain why inflation has remained near two percent since 1990, MMT has no clear explanation for the relative success of inflation targeting.

Previously, whenever I criticized MMT I was told that I had gotten it all wrong, so we’ll see what sort of feedback this gets.  Brad DeLong also seemed a bit confused by their “theory”:

I think I am beginning to understand what had confused me: MMT is not M, or M, or T.

It seems to me that MMT argues that inflation is caused by excessively expansionary fiscal policy that pushes the economy past full employment, and that the cure for inflation is higher taxes.  If so, the theory is false.  They also seem to be arguing that central banks cannot control the price level by adjusting the money supply through open market operations.  Again, this is false.  Central banks control the price level through policies that affect the supply and demand for base money.

PS. Mark Sadowski expanded on DeLong’s remark:

I’ll get grief for this but like DeLong, I regard Modern Monetary Theory as none of the above. It’s more Ancient Fiscal Tautology.

1) Ancient
Chartalism, which is the intellectual foundation of MMT, was developed by G.F. Knapp in the 1920s, with contributions by Alfred Mitchell-Innes and Abba P. Lerner over 60 years ago. Not much of substance has happened since.

2) Fiscal
Exchanging money for goods or services is called “spending”. Issuing bonds in exchange for goods or services is called “borrowing.” Funding the difference via taxation is called “taxing.” Spending, borrowing, and taxing together make up fiscal policy, not monetary policy.

3) Tautology
Unless the proponents of a point of view, like MMT or Austrian Praxeology, admit that it is a set of assumptions that is falsifiable, then they don’t have a theory, they have a tautology.



26 Responses to “What is the MMT theory of inflation?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    14. October 2018 at 20:25

    Well, the important aspect to remember is that in macroeconomics, no one is ever wrong.

    In macroeconomics, you have extraordinarily intelligent people, debating with the utmost certitude and conviction (and sometimes even with a fillip of moral righteousness), but positing diametrically opposed positions.

    Well, I think “diametrically opposed.” Sometimes just deciphering what is being posited is a challenge.

    I do ponder this: Suppose you have an economy where the supply-siders were totally regulated, but had captured regulatory agencies.

    So, each year the supply-siders agree with regulators on 5% price hikes (mandated by regulation, think Nixonian milk-price supports or regulated airline fares) and on supply levels.

    In such an economy you would get 5% inflation every year, as measured. The central bank could validate the price hikes and have economic growth, or they could not validatem which would result in a reduction in output, but prices would still go up 5% as required by regulation, and as measured. Airfares are up 5% and that is that.

    Of course, the US economy of the 1960s was not totally regulated, but large swathes were.

    Then we have Japan. One would think you would see inflation in Japan, given the central bank has held interest rates at near-zero on 10-year bonds, purchased JGBs and equity ETFs very heavily, and pays negative interest on some some (I think most) reserves.

    I have spent 10 years earnestly wrestling with monetary policy, and most of a lifetime thinking about macroeconomics, as a hobby I suppose.

    I think my next hobby will be gardening. Beekeeping maybe.

  2. Gravatar of Brett Brett
    14. October 2018 at 20:51

    I don’t know that they’re arguing that it is caused by excessive expansionary fiscal policy and too-low taxes in the present system, but that you could have a system where the primary source of new money is fiscal and the mechanism for reducing the amount of money is fiscal.

    I think it would be very prone to inflation (given the performance of governments in the 1970s), but it could exist.

  3. Gravatar of Jerry Brown Jerry Brown
    15. October 2018 at 05:51

    “It seems to me that MMT argues that inflation is caused by excessively expansionary fiscal policy that pushes the economy past full employment, and that the cure for inflation is higher taxes.”

    It is more complicated than that. MMT argues that inflation can sometimes result from ANY source of excess demand when an economy is at full production capacity, and therefore unable to increase production. This could be demand from the foreign sector or the private sector or, yes, from the government through fiscal policy. The ‘cure’ for this type of inflation is to reduce that excess demand (if supply cannot be boosted). One way to do that would be tax increases. But other ways may be government spending decreases, or policy that makes it more expensive to borrow or lend. Generally, MMT supports strengthening the ‘automatic stabilizers’ in the economy and that is where the Job Guarantee program fits in.

  4. Gravatar of Ralph Musgrave Ralph Musgrave
    15. October 2018 at 05:59

    I don’t entirely agree with the claim in “The Bridge” article that “MMTers do not see government debt per se as a problem”. Actually the two co-founders of MMT, Warren Mosler and Bill Mitchell (like Milton Friedman) advocate a “zero government borrowing” regime, while issuing enough zero interest yielding base money to keep the economy at capacity.

  5. Gravatar of Ralph Musgrave Ralph Musgrave
    15. October 2018 at 06:15

    The Bridge article concludes, “….an MMT program of money-financed government spending would risk triggering an excessively sharp increase in inflation…”. Well that depends ENTIRELY on who decides how much extra money to create and spend. If the decision was left to those economic illiterates known as “politicians” clearly there’d be trouble. With a view to avoiding “trouble” one possibility (advocated for example by Positive Money) is for some sort of committee of economists to take that decision, perhaps in the case of the UK, for example, the existing Bank of England Monetary Policy Committee.

    Assuming the BoE MPC acted with the same responsibility as it currently does with interest rate adjustments, I don’t see the problem.

    Also Bernanke seems to think the above sort of arrangement would work. See his para starting “A possible arrangement…” halfway down here:


  6. Gravatar of Justin Justin
    15. October 2018 at 06:45

    I don’t know what it is about monetary policy and trade that causes many to reach for the kookiest possible explanations. Here’s a question: what is weirder MMT or ABT? I’m leaning toward MMT.

    Great point by Sadowski.

  7. Gravatar of Benjamin Cole Benjamin Cole
    15. October 2018 at 07:17

    The money supply, as measured by M2, has about doubled in the US since 2008.


    The PCE price index is up about 16%.


    Of course, in the US, most of the money supply is created by commercial bank lending, but controlled through Fed reserve requirements (the old days) or interest rates, IOER, reverse repos and QE or anti-QE.

    So, I see no problem in some of the money supply being created through money-financed fiscal programs. Why would this lead to inflation? Even doubling the money supply in 10 years did not lead to much inflation.

    Suppose the money supply had doubled in the last 10 years, but a portion of it through money-financed fiscal programs? Why would this be more inflationary?

    Money-financed fiscal programs do have some sober proponents; Ben Bernanke advocated money-financed fiscal programs when speaking in Japan in 2003.


    Seems like a good idea to me.

    Extreme cases:

    Japan financed WWII by money-financed fiscal programs, or issuing bonds that were bought by the Bank of Japan. They ended up the war with no debts.

    The US financed WWII by borrowing money. The US ended up WWII with federal debt at 120% of GDP. Quite a burden on taxpayers, and the top federal tax rate was 90% through the 1950s and into the 1960s.

    This is an interesting topic.

  8. Gravatar of grey enlightenment grey enlightenment
    15. October 2018 at 08:49

    It would seem there are two types of economics: one that applies to small and medium-sized countries and a second that applies to countries with reserve currency status (Germany, US, Japan). This leads to possible unexpected and divergent results. The Trump tax cuts for example have not caused inflation, but may actually be deflationary. This would apply to countries with reserve status would be inflationary for countries without such status. When a strong economy tries to curb deflation the result is more deflation, as the failure of the trump tax cuts and tariffs to create inflation have shown. Boosting inflation for reserve status economies req. a demand-side approach.

  9. Gravatar of Justin Justin
    15. October 2018 at 10:27


    What does “reserve currency” status have to do with the price of tea in China (denominated in the reserve currency)?

    Reserve currency status doesn’t mean much at all, greater liquidity, possibly slightly lower long term yields as a result of that. Central banks of small countries hold the currency or the debt of large countries, for various good reasons, big deal. It’s all about manage the level of spending, and expectations there of. This is fundamentally the same task if we are talking about the USA or Iceland. It doesn’t matter at all of someone else is holding your currency.

  10. Gravatar of ssumner ssumner
    15. October 2018 at 16:30

    Jerry, You said:

    “One way to do that would be tax increases. But other ways may be government spending decreases, or policy that makes it more expensive to borrow or lend.”

    Doesn’t this imply that fiscal policy controls the rate of inflation? After all, even when the Fed targets inflation there will be shifts in velocity, to which the Fed must react with offsetting polices. Maybe I’m wrong, but I read the MMTers as saying fiscal policymakers are the ones who target inflation at 2%, not the Fed.

    Ralph, Financing the debt by printing money? What could go wrong?

    And please don’t suggest that Friedman agreed with the MMTers.

  11. Gravatar of Jerry Brown Jerry Brown
    15. October 2018 at 21:27

    No Scott, I think it implies that MMT says that fiscal policy has a strong ability to control inflation- if policy was done the right way. And in my opinion, based on fairly extensive reading of MMT literature, I would say that MMT considers fiscal policy to be considerably more potent than monetary policy. At least if it was done ‘right’. Which they say fiscal policymakers have NOT done right and are highly critical of them because of that. Which, you know, is kind of different from the way you wrote what MMT says about inflation in the post here or in the original at “The Bridge”.

    In any case, my one paragraph comment earlier cannot be taken as even a very short summary of what MMT says in whole about inflation. There is a lot. It was just an attempt to correct one statement about what MMT says about inflation caused by excess spending. It was accurate in that regard.

  12. Gravatar of Ralph Musgrave Ralph Musgrave
    16. October 2018 at 00:55

    Scott, You ask in your comment just above what could go wrong with funding a deficit via freshly printed money, your suggestion presumably being that we get excess inflation. My answer to that possibility, to repeat, which is also the answer suggested by Positive Money and others, is to have some sort of independent committee of economists decide how much stimulus is needed from time to time. Indeed, we already have such committees deciding how much stimulus is needed: central bank committees and the various “fiscal responsibility committees” which have sprung up around the world recently. Those existing committees are more than able to mess things up: witness the recent decade long recession. I don’t see why the “Positive Money committee” would be any worse.

    As to whether Friedman agreed with MMTers, he certainly claimed in 1948 (as do Warren Mosler and Bill Mitchell) that interest yielding government debt is not desirable.

    Re Friedman, see his para starting “Under the proposal…” here:

    Re Mitchell, see:

    Re Mosler, see 2nd last para here:

  13. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    16. October 2018 at 02:59

    Fatal point?
    (Taxes drive money) VS (Someday government will compensate your money)

    They are not entirely wrong.
    Just do it both NGDPLT and supply side(?) good reform which some MMTers says.

    It seems MMTers’ PPF are somewhat different.(more forward and deep(?), and under recent monopolistic competition, it is getting more important,I think.Because the government is monopolistic supplier of money.)



  14. Gravatar of ssumner ssumner
    16. October 2018 at 08:05

    Jerry, So who implements the 2% inflation target?

    Ralph, It’s monetary policy that determines inflation, not fiscal policy.

  15. Gravatar of Ralph Musgrave Ralph Musgrave
    16. October 2018 at 11:20

    Scott, I fully accept that fiscal policy may have no effect on demand or inflation, if by fiscal policy you mean “government borrows $X, spends $X and gives $X of government bonds to borrowers”. That’s a good argument for abandoning fiscal policy altogether. But having done that, i.e. abandoned any further increases in government debt, as advocated by Friedman, Mosler, etc, stimulus will still be required from time to time, so what to do? Well if government debt eventually vanishes, interest rate cuts will ultimately no longer be possible because central banks cut interest rates by creating new base money and buying up government debt. So, again, what to do?

    Well one possibility is to simply have “the state” (i.e. government and central bank) create money and spend it (and/ or cut taxes). That idea actually combines fiscal and monetary policy in that there is an immediate fiscal effect (e.g. government hires more public sector workers), plus there is a monetary effect: the increase in the stock of base money resulting from that extra spending. Keynes actually suggested that “print and spend” idea in the fifth para of his letter to Roosevelt in the 1930s. I don’t know if he repeated the idea in his “General Theory” book. Indeed MMT is often criticised for being just Keynes writ large, which is a criticism with some force, I think, though in defence of MMTers I’d say they’ve produced some other ideas, like demolishing the IMF’s “fiscal space” notion.

  16. Gravatar of Jerry Brown Jerry Brown
    16. October 2018 at 12:04

    Scott, here is a summary of MMT plans to control demand side inflation from Bill Mitchell. It is probably all you wanted to know about inflation and MMT (plus some). bilbo.economicoutlook.net/blog/?p=10554

    The short answer to your question “who implements the 2% inflation target?” would be that the Fed would continue its efforts to maintain price stability, but that those efforts would be assisted by an increased level of fiscal automatic stabilizers in the form of the MMT Job Guarantee idea. MMT views current monetary policy as designed to control inflation by maintaining a level of unemployment sufficient to restrain increasing wage demands as an economy heats up. It proposes that instead of using a pool of unemployed people to condition wage increases, a pool of employed people at some minimum level of pay would provide a better, more efficient, and more humane way to achieve the same goal while also adding supply side capacity. That is my summary of the Job Guarantee idea.

  17. Gravatar of Lewis Lewis
    17. October 2018 at 09:25

    I read this recently, and it makes it sound like MMT, at the academic rather than advocacy level, isn’t that bold:


    “Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability.”

    I don’t know if people from the MMT community actually agree with this assessment. For example, it only mentions the jobs guarantee in passing, but for advocates the job guarantee seems essential.

  18. Gravatar of Arilando Arilando
    17. October 2018 at 10:20

    Sumner, what MMT believes is this:
    1. The central bank should park interest rates at 0%
    2. The government should fund all its deficits through printing money
    3. Increasing or decreasing deficits should be the way fiscal/monetary policy (now combined into 1 essentially) is conducted
    4. The government should guarantee a job to everyone who wants it, at a fixed hourly wage, which then becomes the minimum wage in the economy

  19. Gravatar of Ralph Musgrave Ralph Musgrave
    17. October 2018 at 14:26

    Jerry Brown and Arilando,

    JG is actually an entirely separate idea to the monetary aspects of Modern “Monetary” Theory. To illustrate, there was a JG scheme in the 1930s (the WPA) without MMT.

    While I support the monetary aspect of MMT and I think JG is an idea with possibilities, the most vociferous advocates of JG (e.g. Pavlina Tschernova) strike me as living in la-la land: they grossly underestimate the problems involved in implementing JG, which is why the idea has been tried a dozen times before and has normally ended in failure.

  20. Gravatar of Matthew Waters Matthew Waters
    18. October 2018 at 06:07

    I talked on Twitter with an MMTer about inflation. Well, it was weird.

    They kept pointing to a job guarantee as regulating wages. But if market wages were higher than job guarantee, nobody would take the government job.

    If money yields 0% and government only finances deficits by money printing, then taxation is necessary to reduce inflation. But those are arbitrary constraints. With either constraint relaxed, there are better ways to moderate inflation than tax policy. Tax policy is very slow and clunky. Interest rates or buying/selling bonds is instant by comparison.

  21. Gravatar of Matt McOsker Matt McOsker
    18. October 2018 at 06:12

    Based on my reading of MMT the causes of inflation can come from mix of different scenarios.

    1) Real resource capacity constraints – a lot of money chasing too few resources. This could be fiscal and/or monetary in nature

    2) Fed short term interest rate policy – think Neo-Fisherism. If the fed raises the FFR, now plug that rate into your forward pricing formula for non-perishable goods and you get higher future prices. Warren Mosler speaks specifically to the latter. Now combine higher rates with larger deficits – higher rates can fuel even higher deficits, and money creation via the interest income channel. If the real interest rate on the debt exceeds the real growth rate in GDP then too much inflation may follow, and debt sustainability becomes a problem. Note the two concepts don’t have to be mutually exclusive.

    3) Non-sovereign debt situations. Weimar owing war debt in foreign currency. Print your currency, go to FX markets and dump it to purchase the currencies you need = inflation.

    There may be other scenarios, but these are a few based on my read of MMT. #2 above is related to monetary policy coming from the Fed.

  22. Gravatar of Bob Murphy Bob Murphy
    18. October 2018 at 07:48


    Sorry to thread-jack (is that the term?), but I wanted to at least make sure you saw the comment I left on one of your older posts at EconLog:



    I wish I had chimed in on this earlier; I hope you are still checking the comments. If you get a chance, could you please elaborate on this part of your post?

    “Because recessions are very different from structural problems. In the early 1930s, the US had perhaps the most structurally sound economy in all of human history, up to that moment in time.”

    The reason I ask is that I think you are conceiving of “structural problem” differently from how Austrians (or Arnold Kling for that matter) are using the term. So my point isn’t to pounce on you, but just to understand what you seem to think we mean when we diagnose recessions that way.

  23. Gravatar of JimP JimP
    18. October 2018 at 08:06

    I dont know if the following has been commented on or not – but the editorial in the October 11 Economist has the following:

    Begin quote
    Timely action could avert some of these dangers. Central banks could have new targets that make it harder to oppose action during and after a crisis. If they established a commitment ahead of time to make up lost ground when inflation undershoots or growth disappoints, expectations of a catch-up boom could provide an automatic stimulus in any downturn.
    End quote

    That is real good – if it could happen.

  24. Gravatar of Ralph Musgrave Ralph Musgrave
    18. October 2018 at 23:48

    Matthew Waters,

    Re your claim that tax policy is slow to work, the UK finance minister has the power to adjust the sales tax VAT at the press of a button, and he actually did that twice during the recent crisis. Plus interest rate adjustments do not work all that quickly. Obviously a central bank can change the official central bank rate instantaneously, but according to a Bank of England study, it takes a year for that to have its full effect on the real economy.

  25. Gravatar of Matthew Waters Matthew Waters
    19. October 2018 at 05:15

    Ralph Musgrave,

    Parliament had to change the VAT rate from 17.5% to 20%. There was a six month lag between Royal Assent and the VAT raise taking effect.


    News reports characterized Osbourne as having full control over the VAT rate, but Parliament still had to pass the rate change.

    The tax equivalent of FOMC would have an Executive committee setting tax rates in response to economic data. You could draw it up on paper, but it would be political disaster. The mechanics are more difficult than IOER or OMOs as well.

    The exception is if IOR hits the zero-lower-bound. Then I support a Bernanke helicopter money system, as opposed to open market purchases of non-gov assets. Negative IOR with restrictions on paper cash printing may be preferable to helicopter money. But I think helicopter money is more politically palatable.

  26. Gravatar of Alexander Hamilton Alexander Hamilton
    23. October 2018 at 04:40

    Great post Scott. Using fiscal policy to either 1) Target inflation or 2) Counteract the business cycle is just plain stupid. Sorry kids no new school this year inflation is above target/we’re not in a recession. Fiscal policy should be based on the NPV and the CBR of properly appraised projects. Not bridges to nowhere, makework or featherbeading (their “job guarantee”.) If low interest rates increase the CBR above an approved threshold then build it. Otherwise let Monetary Policy do the heavy lifting.

    As an aside: Any thoughts on https://initiativeq.com/knowledge/economic-model

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