Weaknesses of MMT as a guide to development policy

Abstract

This paper addresses the limitations of Modern Money Theory (MMT) as a guide to development policy. We explore two main questions on this topic: whether policies championed by MMT advocates (i) ought to be implemented in low- and middle-income economies and (ii) can be implemented. In relation to the first question, we argue that the MMT literature mischaracterises the essence of the development challenge for low- and middle-income economies. Our argument is that the chief long-run growth challenge faced by developing countries concerns structural transformation rather than general aggregate demand insufficiency. We use several formal representations of the consumption–investment trade-off in growth theory, found in the Harrod–Domar growth model, the Feldman–Mahalanobis model and Kalecki’s 1963 growth model to illustrate this point. Concerning the second question, we argue that even if MMT had the correct diagnosis of the principal growth challenge faced by developing countries, its chief policy recommendations would likely be counter-productive if implemented outside of select advanced economies. We draw from the international economics literature on currency hierarchy and exchange rate volatility to illustrate this point.

Macroeconomic policy at the end of the age of abundance

“…These countries are characterised as relatively capital-abundant and labour-constrained: the size of the labour force imposes a maximum on output and employment such that Y < Y Ã . This contrasts with the situation in lower-and middleincome countries where labour is abundant and capital is the limit so that at full capacity output, N > L: the available labour force substantially exceeds employment (Aboobaker/ Ugurlu 2023). This kind of capital-constrained supply-side characterises the second type of supply constraint.…”

Dollar Liquidity, Financial Vulnerability and Monetary Sovereignty

“…As Aboobaker and Ugurlu (2023) have argued, this misrepresents the stylized facts of developing countries in an important way: developing countries generally face a problem of capital shortage rather than capital abundance (Kalecki, 1955;Storm, 1997). In contrast with the detailed descriptions of monetary transactions provided by MMT authors, theorization of the productive structure of the economy tends to be highly stylized.…”

“…These issues have led to criticisms of attempts to apply the MMT-derived monetary sovereignty concept to LMICs (Aboobaker and Ugurlu, 2023;Bonizzi et al, 2019;Vergnhanini and Conti, 2018;Vernengo and Caldentey, 2020). They have also led both critics and proponents to consider the relationships between monetary sovereignty and currency hierarchies (Murau and van 't Klooster, 2022;Patrício Ferreira Lima, 2022;Prates, 2021).…”