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>
Highlights
The Modern Money Theory (MMT) approach has gained increasing visibility for predicting the crisis of the European Monetary Union (EMU)
There is much disagreement regarding the causes of EMU stagnation, MMT took advantage of its acknowledged economic forecasts to claim the victory of their theoretical assumptions over mainstream economics
As a result, according to MMT, government deficit spending is never subject to market discipline as long as the bonds are issued in the domestic currency
Summary
The Modern Money Theory (MMT) approach has gained increasing visibility for predicting the crisis of the European Monetary Union (EMU). MMT raises important questions to demystify some elements of the so-called “New Macroeconomic Consensus” (NMC)3 It refutes the necessity of causing recession and unemployment as the only efficient path in order to restore balanced growth. Any fear of deviating from markets’ rules would be based on irrational fear and on misunderstandings on how economy and public budget functions Due to these claims, MMT has attracted criticism from both the orthodox and the heterodox economics. The purpose of this article is to develop a heterodox critique against MMT, from the perspective of the “international currency hierarchy” framework In essence, it argues that countries do face external constraints over domestic policies and that the disciplinary power of international markets is greatly asymmetric, being more severe in those countries that issue the so-called peripheral currencies.
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