Modern Monetary Theory: a criticism from the periphery

  • Rodrigo Vergnhanini State University of Campinas (UNICAMP)
  • Bruno De Conti State University of Campinas (UNICAMP)
Keywords: modern monetary theory, currency hierarchy, functional finance, policy constraints, peripheral countries

Abstract

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.

Downloads

Download data is not yet available.

References

Ahmed, S. and A. Zlate (2014), “Capital flows to emerging market economies: a brave new world?”, Journal of International Money and Finance, 48, p. 221-248.

Andrade, R. And D. Prates (2013), “Exchange Rate Dynamics in a Peripheral Monetary Economy”. Journal of Post Keynesian Economics, vol. 35, p. 399-416.

Arestis, P. and M. Sawyer (2008), “New consensus macroeconomics and inflation targeting : Keynesian critique.” Economia E Sociedade, 17(special number), p. 629–653.

Biancarelli, A. (2007), Integração, ciclos e finanças domésticas: o Brasil na globalização financeira. PhD Thesis, Institute of Economics, University of Campinas.

Bielschowsky, R. (2000), Cinquenta anos de pensamento na CEPAL. Rio de Janeiro: Record/CEPAL.

Bruno, V. and H. S. Shin (2014), Cross-border banking and global liquidity. BIS working paper 458.

Carneiro, R. (2008), “Globalização e inconversibilidade monetária”. Revista de Economia Política, 28, p. 539-556.

Cesaratto, S. (2012a), “A reply to Wray – part I”. Naked Keynesianism Blog. Accessed 15 July 2014. http://nakedkeynesianism.blogspot.com.br/2012/08/a-reply-to-wray-part-i.html.

Cesaratto, S. (2012b), “A reply to Wray – part II”. Naked Keynesianism Blog. Accessed 15 July 2014. http://nakedkeynesianism.blogspot.com.br/2012/08/a-reply-to-wray-part-ii.html.

Cesaratto, S. (2012c), “The spurious victory of MMT”. Naked Keynesianism Blog. Accessed 15 July 2014. http://nakedkeynesianism.blogspot.com.br/2012/07/spurious-victory-of-mmt.html.

Cesaratto, S. (2016), “The state spends first: Logic, facts,fictions, open questions”, Journal of Post Keynesian Economics, 39:1, p. 44-71, DOI:10.1080/01603477.2016.1147333

Cohen, B. (1998), The geography of money. Cornell University Press.

De Conti, B. (2011), “Políticas cambial e monetária: os dilemas enfrentados por países emissores de moedas periféricas”. Phd diss, State University of Campinas and Centre d’Économie de l’Université Paris-Nord - Université Paris 13.

De Conti, B. and D. Prates (2016). “The International Monetary System hierarchy: current configuration and determinants”. The 28th Annual EAEPE Conference Manchester, UK: 03-05 November 2016. http://eaepe.org/?page=events&side=annual_conference&sub=call_for_papers_eaepe2016.

De Conti, B.; A. Biancarelli and P. Rossi (2013), “Currency hierarchy, liquidity preference and exchange rates: a Keynesian minskyan approach". Paper presented at Congrés de L'Association Française d'Économie Politique, Bordeaux, July, 3-5.

De Conti, B.; D. Prates and D. Plihon (2014), “A hierarquia monetária e suas implicações para as taxas de câmbio e de juros e a política econômica dos países periféricos”, Economia e Sociedade, vol. 23, n. 2 (51), p. 341-372. http://www.scielo.br/pdf/ecos/v23n2/0104-0618-ecos-23-02-0341.pdf.

Eichengreen, B.; R. Hausmann and U. Panizza (2005), “The Mystery of Original Sin”. In: Eichengreen, B. and R. Hausmann (eds.) Other People's Money. Chicago University Press.

Fields, D. and M. Vernengo (2011), “Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective”. Working Paper, n. 666. Levy Economics Institute Of Bard College.

Flassbeck, H. (2001), “The exchange rate: economic policy tool or market price?” Discussion paper, n. 157. United Nations Conference on Trade and Development, Geneva, November.

Friedman, M. (1953), “The case for flexible exchange rates”, Essays in Positive Economics. Chicago: University of Chicago Press.

Goodhart, C. (1989), Money, Information and Uncertainty. Cambridge, MA: The MIT Press.

Guttmann, R. (2016), Finance-Led Capitalism. Palgrave Macmillan US.

Guttmann, R. And D. Plihon (2011), "Whither the Euro? History and Crisis of Europe’s Single-Currency Project", In : Epstein, G. A. and H. Wolfson (eds.) Handbook of the political economy of financial crises.

Keynes, J. (1930 [1970]), “Treatise on money, vol.2 – The Applied Theory of Money”, in The Collected Writtings of John Maynard Keynes, vol. VI. London: MacMillan.

Keynes, J. (1936 [1964]), The general theory of employment, interest and money. 14. ed. London: MacMillan.

Knapp, G. (1924), The State Theory of Money. London: Macmillan & Company Limited.

Lavoie, M. (2013), “The monetary and fiscal nexus of neo-chartalism: a friendly critique”. Journal of Economic Issues, vol. 47, n. 1, p. 1–32.

Lavoie, M. (2014), Post-Keynesian economics: new foundations. Edward Elgar Publishing.

Lerner, A. (1943), “Functional Finance and the Federal Debt”. Social Research, 10, p. 38–51.

Minsky, H. (1986), Stabilizing an Unstable Economy. London: McGraw-Hill Educatin.

Mitchell, W. (1998), “The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment”, Journal of Economic Issue, 32 2, p. 547–555.

Mitchell, W. and L. R. Wray (2005), “In defense of employer of last resort: a response to Malcolm Sawyer”, Journal of Economic Issues, 39 1, p. 235-244.

Palley, T. (2013), “Money, fiscal policy, and interest rates: a critique of modern monetary theory”, Working Paper, n. 109, Institute for Macroeconomics, Dusseldorf, Germany.

Palley, T. (2015a), “Money, Fiscal Policy, and Interest Rates: a critique of modern monetary theory”, Review of Political Economy, 27 1, p. 1-23.

Palley, T. (2015b), “The Critics of Modern Money Theory (MMT) are Right.’ Review of Political Economy 27 1: 45–61.

Paula, L.; B. Fritz and D. Prates (2017), “Keynes at the periphery: Currency hierarchy and challenges for economic policy in emerging economies”, Journal of Post Keynesian Economics, May.

Prates, D. (2002), Crises financeiras dos países “emergentes”: uma interpretação heterodoxa. PhD Thesis, Institute of Economics, University of Campinas.

Prates, D. (2015) O regime de câmbio flutuante no Brasil 1999-2012: especificidades e dilemas. Brasília, IPEA.

Rey, H. (2015), “Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence” Working Paper, n. 21162, National Bureau of Economic Research.

Rochon, L. P. and M. Vernengo (2003), “State money and the real world: or Chartalism and its discontents”, Journal of Post Keynesian Economics, 26 1, p. 57 – 67.

Tcherneva, P. (2006), “Chartalism and the tax-driven approach”, in Arestis, P. and M. Sawyer (eds.), A Handbook of Alternative Monetary Economics, Cheltenham: Edward Elgar, p. 69-86.

Thirlwall, A. (1979) "The balance of payments constraint as an explanation of the international growth rate differences." PSL Quarterly Review, 32.128.

Tymoigne, E. and R. Wray (2014), “Modern money theory: a reply to Palley”, Review of Political Economy, 27 1, p. 24–44.

Wray, R. (1998), Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar: Cheltenham, U.K Minsky.

Wray, R. (2007), “The Employer of Last Resort Programme: Could It Work for Developing Countries?” Economic and Labour Market Paper, vol. 5.

Wray, R. (2012), “Paul McCulley – MMT Won: Declare Victory But Be Magnanimous About It”. EconoMonitor, Randall Wray Blog. Accessed 24 March 2016. http://www.economonitor.com/lrwray/2012/06/25/paul-mcculley-mmt-won-declare-victory-but-be-magnanimous-about-it/.

Wray, R. (2014a), “MMT and external constraints”. EconoMonitor, Randall Wray Blog. Accessed 24 March 2016. http://www.economonitor.com/lrwray/2014/02/24/mmt-and-external-constraints/.

Wray, R. (2014b), “From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy”, The Levy Economics Institute Working Paper Collection, 792, p. 1–35.

Published
2018-01-31
How to Cite
Vergnhanini, R., & De Conti, B. (2018). Modern Monetary Theory: a criticism from the periphery. Brazilian Keynesian Review, 3(2), 16-31. https://doi.org/10.33834/bkr.v3i2.115
Section
Articles