Modern Monetary Theory: a criticism from the periphery

Abstract

<p>This paper presents the recent debate on modern monetary theory (MMT) and contributes to a critical view on its application to peripheral countries. MMT has been centered on both demystifying postulates of the ‘New Macroeconomic Consensus’ and offering an alternative theory to reach full employment with price stability. However, it has been criticized for assuming that constraints on domestic policies are generally self-imposed, not arising from international markets. Using the “international currency hierarchy” approach, this paper argues that peripheral countries, in the context of financial globalization, are not fully sovereign in determining its own macroeconomic policy. Our main argument is that currencies issued by peripheral countries do not fulfill money classical functions at the international level. Being hence illiquid at the international scenario, these peripheral currencies (and assets) are demanded by the international investors only in the quest for high returns; moreover, this demand depends on the “international liquidity preference” and the markets’ confidence in this country. Consequently, interest rates in peripheral countries tend to be higher and volatile. Additionally, the exchange rate is potentially under the pressure of this capital flows movements. Finally, monetary, fiscal and exchange policies in peripheral countries have constrains that are not considered by MMT.</p>

Modern Money Theory: Rise in the International Scenario and Recent Debate in Brazil

“…This line of argument centered on the hierarchy of currencies was already present in the works of Prates (2017) and Vergnhanini and De Conti (2018). For these authors, MMT underestimates the speculative nature of capital flows in the post-Bretton Woods era and the exchange rate volatility in open peripheral economies.…”

Gestão da riqueza velha e criação de riqueza nova: uma crítica à Modern Money Theory (MMT)

“…Há, portanto, uma dimensão política do princípio da demanda efetiva que pode dificultar a cooperação entre o Estado e o setor privado na busca do pleno emprego. Destaca-se, por fim, a subavaliação, por parte da MMT, dos impactos do Sistema Monetário e Financeiro Internacional (SMFI) sobre a autonomia de política macroeconômica (Verganhini;De Conti, 2017;Prates, 2017). A adesão de Wray (2015) ao trilema de Mundell (1968) desconsidera as assimetrias do SMFIexplicitadas nos diferentes prêmios de liquidez das moedas domésticas no plano internacional e na subordinação dos mercados financeiros periféricos às decisões dos investidores globaise seus efeitos deletérios sobre o movimento das taxas de juros e de câmbio, num contexto de abertura financeira (Prates, 2002;De Conti, 2011).…”

Beyond Modern Money Theory: a Post-Keynesian approach to the currency hierarchy, monetary sovereignty, and policy space

“…However, the effective monetization of public debt is bounded in money-manager capitalism (Minsky 1986) by the market constraints and reactions (Palley 2019). MMT has also been criticized by PK scholars for neglecting open-economy considerations, for focusing too much on the case of the US, the issuer of the key currency (the US$) (for example, Cesaratto 2012; Palley 2015a; Rochon and Vernengo 2003) and/or for disregarding developing (or peripheral) economies' specificities, such as the existence of external constraints, the implications of the CH for exchange-rate dynamics, the actual exchange-rate regimes, and the policy space of those economies (Bonizzi et al 2019;Epstein 2019;Vergnhanini and De Conti 2017;Vernengo and Caldentey 2019). In this section we summarize those implications on the basis of a Post-Keynesian-Structuralist approach on the CH (Andrade and Prates 2013;Paula et al 2017).…”