Modern Money Theory: A Reply to Palley

Abstract

Modern Money Theory (MMT) has explained why monetarily sovereign governments have a very flexible policy space that is unconstrained by hard financial limits. It has provided institutional and theoretical insights about the workings of economies with monetarily sovereign and non-sovereign governments. It has also provided policy insights with respect to financial stability, price stability and full employment. Yet there have been many critics of MMT, including Palley (2014). Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses Palley's criticism of MMT using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.