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Some notes on Modern Monetary Theory


Throughout this paper, we will observe that Modern Monetary Theory (MMT) constitutes a framework that challenges the mainstream approach to monetary and fiscal policy. MMT posits that sovereign governments, which issue their own currency, possess substantial flexibility in funding public expenditures and fostering economic growth. In contrast to conventional perspectives, MMT argues that public spending is not constrained by tax revenue but rather by the real capacity of the economy to absorb such spending without causing inflation.  

According to MMT, economic growth can be stimulated by expanding aggregate demand through expansive fiscal policies. Since the state can issue its own currency, governments have the capacity to achieve full employment and fund public spending without necessarily relying on taxing or borrowing. However, it is important to note that inflation is a crucial consideration within the MMT framework. Monetary policy aims to boost the economy until it reaches full productive capacity. Beyond this point, inflation is likely to occur.  

The proposals put forth by MMT are undeniably compelling for policy formulation. However, they raise the question of their feasibility and potential effectiveness when implemented in peripheral countries for the purpose of promoting economic progress. This paper aims to contribute to the ongoing debate surrounding the applicability of the MMT approach in Latin American countries. While some research has explored MMT ideas in the context of the periphery, there is a noticeable dearth of studies specifically focused on Latin American countries, with the exception of Edward’s (2019) paper, wherein he argues that MMT-style policies have been implemented with unfavorable outcomes. Nevertheless, a critical examination from the structuralist standpoint is noticeably absent. This paper seeks to address this gap and provide such a critical analysis.  

The paper is organized as follows. In the second section, the MMT approach is presented through the perspectives of prominent proponents, including Warren Mosler, Randall Wray, William Mitchell, and Stephanie Kelton, who have contributed significantly to MMT insights. The third section discusses the challenges of implementing the MMT approach in peripheral economies. Section four exposes some empirical data of Latin America as a case study to show the possible limits of the MMT policy proposed in the periphery.  


  1. The MMT approach overview 

The MMT points out that under a gold standard, money is considered to be an economic resource, and the state has to tax or borrow revenue to fund its spending. However, under a fiat-money system, such reasoning is not applicable since the government is both the issuer and user of money. Therefore, there is no budget constraint as in a gold standard or any commodity money system (Mosler, ).   

According to Wray (year), we have been residing within a state money system for the preceding 4,000 years. Within this framework, states possess the authority to designate the unit of currency for accounting purposes and to establish commitments denominated in said currency, including taxes, tribute, tithes, fines, and fees. To fulfill these obligations, the state issues a currency that is accepted as a means of payment. Contemporary governments are equipped with central banks that facilitate the creation and receipt of payments on their behalf. It is the government’s prerogative to direct the central bank to credit or debit accounts held by private banks.  

In the context of the MMT framework, the state sets the supply and demand of its own fiat currency. The issuance of money comes out of thin air, as the government generates currency (comprising central bank reserves and physical currency) via expenditures, while private banks generate deposits (notes) through loan activities. It is important to acknowledge that while both the governmental and private banking sector engage in money creation within a fiat currency system, a «money pyramid» exists. This pyramid positions the government’s own currency at its pinnacle, beneath which resides private bank money and various other forms of currency that may be present. On the other hand, a sovereign government stimulates the demand for its own currency by imposing taxes and other obligations (e.g., fines) within its jurisdiction, exclusively payable in said currency. The demand for government money is rooted in an administrative framework, whereas private bank money is contingent upon market dynamics, given that private banks generate deposits through loans (Wray, [year]).   

Building upon the aforementioned perspective, it can be posited that the MMT recognizes the dual nature of money as both endogenous and exogenous. This acknowledgment arises from the fact that both the state and private banks generate money. The state’s money creation occurs within a top-down administrative framework, while private banks contribute to money creation through responding to public demand.  

As the state currency is imposed from the top, taxes are mere instruments of the State to create demand for the currency, rather than a necessity for private funding of the public sector. According to Wray ( ), contrary to a household’s budget, a government that issues its own currency and possesses the authority to compel economic agents within a territory to pay taxes in said currency, “does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid«. Consequently, «a sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.».  

If the public sector provides means of exchange to the currency-users (including taxpayers) and reserves to private banks (required to buy public bonds), neither taxes nor public debt are a necessity but a policy choice (Wray, ).  The possibilities of an economy to expand is set by the amount of means such an economy counts on. The issue does not lie in how an economy will pay to afford goods and services supplies, but how an economy will “resource it” (p.234). Thus, “MMT places inflation at the center of the debate over spending limits” (Kelton, 2020, p.235). From the MMT perspective, the money creation out of thin air is not a problem, but the quantities and the way it is used; thus, deregulation of the private banking system may bring about bubbles and misallocation of resources, and it is a hurdle mostly if it is supplied beyond the point of full employment of the economy’s factors of production (Wray).   

If resources are the limit to the monetary policy, investment is the key variable that expands such resources and make space for the money expansion aimed to get full employment. Resources must be allocated in capital-building activities in order to get higher volumes of output in the future. Contrary to the orthodoxy, the MMT asserts that investment does not come from savings but the other way around. Savings are seen as a real variable that stems from investment; since manpower is paid to turn out capital goods that wage labor cannot purchase and consume, which means that there is an abstention of present consumption that left new capacity to produce consumer goods in the future. Therefore, a reduction in individual spending will not boost investment (Mosler, 2018), on the contrary, it would make room for “the paradox of thrift”, where individual savings provoke insufficient demand that discourages investment (Krugman, 2016, p.30) as unsold inventories pile up. In Mosler’s (2018) words:  

Savings equals investment, but the act of investment must occur to have real savings… The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money. (p.11)  

Higher savings means lower consumption and discouragement of investment, which in turn, means lower income and lower savings as “one person’s savings can become another’s pay cut. Savings equals investment. If investment doesn’t change, one person’s savings will necessarily be matched by another’s’ dissavings” (Mosler, p.). In the same guise, a public budget surplus does not raise savings but squeezes the wealth of the non-government sector and shrinks savings (Mitchell, ). 

The identity savings equal investment (S=I) as it is exposed by the MMT makes room for the public sector as a booster of the economic activity, since the government can allocate manpower and capital in capital-building activities. Nevertheless, it does not mean an administrative top-down model of resource allocation, the MMT acknowledges the importance of private sector as source of money creation and as a booster of private initiative. However, it considers that there few governments money creation to serve the public interest and too much private money creation by the for-profit financial sector going to financial markets (Wray, ), which can be interpreted as a too much creation of means of exchange rather than use-value goods and services. In this regard, it is illustrative the Bill Mitchell’s explanation of the Chinese economic success; according to Mitchell (2011), China, as a developing country (capital-scarce economy), is the outcome of a strong domestic growth, rather than an export-led model, boosted by the public spending stimulus that provides income growth, and in turn, rising savings to the private sector. In this view, public sector can create savings as it can encourage private investment –or even, why not? raise directly the public investment.   

In the MMT approach the public spending is seen as a foster of economic activity as it provides funds to the private sector, hence, a balanced government budget means that the currency has return to the public sector without any net contribution to the financial wealth of the private one. To illustrate this point, in Rallo (2017, p.103) an explanation about the MMT reasoning can be examined using the macroeconomic identity of an economy without foreign trade. The purpose here is not to criticize the MMT approach as Rallo (1917) does, but to expose its main features:   


Where each compoent of the equation stands for the following variables: gross domestic product (GDP) equals consumption (C), investment (I), public spending (G). Knowing that investment equals savings and taxes are the counterpart of the public spending, we get the following cleared equation: 




As the equation evidences, the net private savings equals the public budget . 


However, if we allow the equation for foreign trade as it is found in Medina (2017, p.96), the reasoning can give us some key point for the case of the peripheral economies. 



(PNB-C-T-I) + (T-G) + (M-X-Rx) ≡0 


In the given context, (PNB-C-T-I) represents private sector savings, (T-G) denotes the public balance, and (M-X-Rx) signifies the external balance. A trade surplus indicates that the economy is extending loans to its trade partners, as its exports surpass imports from the global market (M<X+Rx). Conversely, if this economy imports more than it exports, it accrues debt with its trade partners (M>X+Rx). Notably, the equation demonstrates that the sum of all balances equals zero; whenever one sector aims to save, at least one of the other sectors must incur debt or dissave. There are four possible outcomes that ensure equilibrium across all balances: a) when both the private and public sectors are saving, the rest of the world must accumulate debt by importing more from the economy than it exports; b) if the public sector and the rest of the world prioritize saving, the private sector must incur debt; c) if the private sector and the rest of the world are saving, the public sector must accrue debt; d) all sectors are balanced, maintaining incomes equal to spending1.    

If we rearrange the equation, the current account (external balance) equals the net private savings.  


(M-X-Rx) ≡ -PNB+C+I+G  

X-M+Rx = PNB-C-I-G  

X-M+Rx  = S-I  


The equation evidence that the excess of investment over domestic savings (S<I) entails a negative current account that is funded by external debt; higher external unbalance means higher levels of external debt.   





The equation illustrated earlier, allow us to see the importance of economic trade as it has to do with the balance of payments and the foreign debt, given that while sovereign currency allows policy space, the issue of debt in foreign currencies reduces such a space (Wray, p.40-41. Modern Money Theory 101: A Reply to Critics by Éric Tymoigne and L. Randall Wray)  

Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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