Modern Monetary Theory: Why it can’t provide sustained economic growth and low inflation



  • Since March 2020, central banks in major economies have been (partially) monetising government deficits through the purchase of a significant part of the new debt issued by the government. In the UK, this has resulted in the rate of growth of money broadly-defined (M4) reaching an extraordinary 14 per cent in 2020.

  • Advocates of Modern Monetary Theory (MMT) propose the systematic use of the state’s monopoly power to print money to pay for government deficits (a ‘partial MMT’ programme), or even all government spending (a ‘full MMT’ programme).

  • The application of a ‘partial MMT’ policy in 2021 in the UK would have led to even higher growth rates of money than in 2020 (above 14 per cent). If a ‘full MMT’ policy had been adopted, and thus all government spending were monetised by the Bank of England, the annual rate of growth of money would have been above 48 per cent in 2020 and would be above 35 per cent in 2021 and 24 per cent in 2022. These figures are incompatible with stable economic growth and low inflation over the medium and long term.

  • When applied to the USA, the monetisation of all the federal deficit in 2020 would have contributed to a 37 per cent increase in the amount of money broadly-defined (M3), compared with the (already extraordinary) 22 per cent registered increase in 2020. In a scenario of a ‘full MMT’ policy, with the monetisation of all federal government spending, the contribution to the growth in the amount of money in the USA would be of 53 per cent in 2020, 18 per cent in 2021 and 13 per cent in 2022.

  • In an MMT-dominated world, the central bank’s only role would be to accommodate fully the financial needs of the Treasury, determined by the government’s own economic policies and political goals – leading to a ‘fiscal dominance’ scenario.

  • Ample statistical evidence shows the correlation between excessive money growth and higher nominal income and inflation. When the amount of money in the economy is too large for too long, there will inevitably be inflationary pressures in the medium to the long term. This has already been the situation since March 2020 particularly in the USA, but also in the UK and the eurozone.

  • Central banks need to choose between either surrendering monetary stability and low inflation altogether and effectively moving towards the adoption of an MMT paradigm, or taking the necessary measures to rein in inflation and take back control of the amount of money in circulation. If the former, both historical evidence and sound monetary theory point at an economy entrenched in enlarged government spending, much higher rates of growth in the amount of money, and therefore higher inflation.

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Dr Juan Castaneda is Senior Lecturer in Economics at the University of Buckingham and Director of the Institute of International Monetary Research. He has been a visiting researcher at Cass Business School in London, and lecturer at UNED University in Madrid. He is the review editor of Economic Affairs and the editor and author of a website specialising in monetary policy and central banking. Since September 2018 Juan has also been a member of the Institute of Economic Affairs’ Shadow Monetary Policy Committee.