Modern Monetary Theory: Implications and Problems

An exploration of the theoretical foundations, policy implications, and critiques of Modern Monetary Theory.

Disclaimer

This paper was produced in MGEC06 (Summer 2025) under the instruction of Prof. Ata Mazaheri.
It is intended for academic purposes only. Any form of plagiarism is strictly prohibited. —

Abstract

Modern Monetary Theory (MMT) “states that government expenditure is necessitated by taxation. That is to say, taxpayers can be taxed only if government spends the currency into the economy.” An argued corollary is that “taxation functions merely as a fiscal instrument for demand management, and the conventional notion of a government budget constraint is a misconception: government expenditure is constrained by inflation, not revenue.” While one objective of MMT is “to ensure job guarantee where even the structurally unemployed can secure an employment,” this paper contends that the framework “is an idealized theory that oversimplifies economic interactions of and between the public and the private sector.” We demonstrate that the job guarantee program is not economically feasible, highlight the unrealistic nature of the inflation-constraint approach without undermining central bank independence, and show that job guarantees can distort supply-side expectations through the Phillips Curve and Dynamic Partial Equilibrium analysis.

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