Definition
Modern Monetary Theory (MMT)
Modern Monetary Theory argues that a country issuing its own currency can never go bankrupt in that currency and should use deficits to pursue full employment, constrained mainly by inflation.
MMT contends that for a sovereign-currency issuer like India or the US, the real limit on government spending is inflation and real resources, not the size of the deficit, since the government can always create money to pay debts in its own currency.
Critics warn that monetising deficits risks runaway inflation and currency collapse, and that emerging economies face external constraints (forex needs, capital flight) that MMT downplays. It remains heterodox but influenced post-pandemic fiscal debates.
Related terms
- Quantity Theory of MoneyThe quantity theory of money states that the general price level is proportional to the money supply, captured in the equation MV = PT (money times velocity equals price times transactions).
- Helicopter MoneyHelicopter money is a radical stimulus where the central bank directly finances government cash handouts to the public, permanently increasing the money supply.
- Fiscal DeficitThe fiscal deficit is the gap between the government's total spending and its total revenue, showing how much it must borrow in a year.
- SeigniorageSeigniorage is the profit a government or central bank earns from creating money — the gap between the face value of currency and what it costs to produce.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.