External debt matters: What are the limits to monetary sovereignty?

Abstract

Proponents of Modern Monetary Theory frequently use the slogan that a nation State that issues its own currency possesses monetary sovereignty. The problem with this definition is that most countries issue their own currency. There are a few such as Ecuador and El Salvador that use the US dollar, or the members of the Eurozone that use a currency, the Euro, that is not issued by a member State, but these are exceptions. For the rest, sovereignty appears to be limited. To assess constraints on sovereignty initially assume a closed economy and abstract from private activity, or assume a socialist economy. Relaxing these initial assumptions will produce the conclusion that private sector activity reduces clarity, but does not impinge on sovereignty. However, the external constraint faced by most open economies does limit monetary sovereignty, irrespective of the exchange rate regime adopted.