Diving Deeper: Research and Literature Review
In the previous blog post, we laid the groundwork for understanding Modern Monetary Theory (MMT) and explored its implications in the political economy. Building upon that foundation, this blog post aims to delve deeper into the subject by examining the existing literature on MMT. We will conduct a comprehensive literature review to shed light on the research questions surrounding MMT and explore the critiques and debates within the field. Through this review, we aim to gain a better understanding of the theoretical assertions, practical policy implications, and relationship of MMT to other economic schools of thought.
Literature Review
The literature on MMT encompasses various aspects of the theory, including its theoretical foundations, policy implications, and its relationship to established economic frameworks. Researchers have explored MMT's conceptualization of money, which challenges traditional notions, and have examined its potential implications for economic policies. The literature also investigates the compatibility of MMT with other schools of thought, such as post-Keynesianism and Keynesianism. Let's now delve into some of the key findings from the literature review.
Proponents of MMT
MMT has garnered support from proponents who argue that it offers valuable insights into policy options for full employment, public purpose, and economic stabilization. Theycontend that MMT provides an alternative perspective to mainstream "sound finance" doctrines, emphasizing the role of fiscal policy in managing the economy. However, critics raise concerns regarding MMT's lack of credible theories of inflation and interest rates, as well as its perceived unrealistic policy proposals.
Critiques of MMT
Applicability to developing countries: Some researchers critically analyze the applicability of MMT to developing countries. They argue that MMT proponents may overlook constraints faced by these countries, such as balance of payments issues and dependence on foreign capital flows. Structuralist development economics offers an alternative framework that incorporates external needs and global asymmetries, providing a more comprehensive analysis for developing countries.
Real-world policy implications: While researchers generally agree with certain aspects of MMT, they caution that the theory's implications for real-world policy may be exaggerated. They argue that while MMT provides valuable theoretical insights, translating these insights into practical policy measures faces political constraints and the need for public trust. MMT policy proposals are not implied by the theory alone. Good fiscal policy balances sound finance and functional objectives, incorporating political realities. More analysis is needed on cryptocurrency implications for MMT.
Modern theory of money: Some critics argue that MMT falls short as a modern theory of money. They contend that MMT's narrow focus on money as a creature of the state neglects the importance of contractual liquidity and orderly financial markets. By overlooking money's liquidity and markets, MMT fails to adequately explain the role and demand for money in modern-market oriented economies.
Deficit focus: MMT's emphasis on deficits has been criticized for diverting attention from other crucial factors in achieving optimal resource allocation and full employment. While MMT rejects arbitrary deficit constraints, critics argue that resource mobilization and interest rate policy play essential roles. A broader analysis that considers financial innovation and optimal policy analysis is necessary.
Relationship to Post-Keynesian economics: The relationship between MMT and Post-Keynesian economics has been a subject of discussion. Some researchers argue that MMT aligns with Post-Keynesianism by focusing on monetary institutions but falls short in terms of macroeconomic tools and growth theory. While MMT provides useful insights into monetary aspects, further engagement with Post-Keynesianism could strengthen the theory's macroeconomic foundations.
Debt theory of money: Critics challenge MMT's debt theory of money and propose alternative perspectives. They argue that MMT's explanation of money as a government promise to accept taxes is flawed and propose alternative theories. These alternative perspectives position money as a positional good, with its value derived from social positioning rather than government promises and tax obligations.
MMT has generated significant debate regarding its theoretical foundations, policy implications, and applicability to different economies. While MMT offers insights into alternative macroeconomic frameworks focusing on the role of money, government budgets, and fiscal and monetary policies, critics argue that the theory has limitations, lacks a coherent explanation of inflation, and is overly focused on deficits.
Through an extensive literature review, we have explored the research questions and critiques surrounding Modern Monetary Theory (MMT). While MMT provides insights into alternative macroeconomic frameworks and challenges conventional economic wisdom, it faces criticism regarding its theoretical foundations, policy implications, and applicability to different economies. Understanding these debates and exploring alternative perspectives is essential for a comprehensive evaluation of MMT. In the next part of this series, we will explore the normative assumptions in mainstream economics and how MMT offers a new perspective. Stay tuned for an in-depth analysis of these topics in Part 3!
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