MMT’s policy prescriptions in Small and Open Economies: Addressing some Controversies

Abstract

According to Modern Monetary Theory, a country that issues its own floating currency -and has no foreign exchange denominated debt- can simultaneously achieve both full employment and price stability through an Employer of Last Resort. The ELR is a policy option in which the government offers a job to anyone willing and able to work at the program's wage. Along with a zero interest rate policy, these prescriptions constitute MMT’s base case for analysis. Unfortunately, they are seldom considered as a whole by critics. Most criticisms of MMT emphasize the inflationary consequences of full employment policy. The author argues that, ultimately, it is the definition of full employment that seems to be the key when discussing the feasibility and desirability of an ELR program. Implementing an ELR program could result in an increase of the price level as measured by some index. Arguing that, as a consequence, full employment should not be pursued is tantamount to keep using unemployment to control the price level.