Monetary sovereignty in the Post Keynesian perspective

Abstract

The global financial crisis and its aftermaths (as the euro crisis) have brought to light key issues for the Post Keynesian literature, such as the intrinsic flaws of an international monetary and financial system anchored in a national currency and the loss of monetary sovereignty (and its implications for the policy space) of the member states of the European Monetary Union. Within this literature, the debate on monetary sovereignty and its relationship with the policy space has been launched by the so-called neo-chartalism approach (or Modern Monetary Theory) adopted by some Post Keynesian scholars, among which stand out Randall Wray. Yet, such approach has many shortcomings. Firstly, the concept of monetary sovereignty proposed is not compatible, at least in some aspects, with the theory on money embraced by many Post Keynesian scholars. Secondly, it is unrealistic due to the underlying assumption of consolidation of the balance sheets of the Treasury and the Central Bank, which disregards the predominant institutional framework in centre and peripheral emerging countries. Thirdly, it is also unrealistic because it overlooks the actual dynamic of the current international monetary and financial system. This lack of realisticness contradicts the Post Keynesian theory as one of its key presuppositions is realism. Therefore, it is still missing a Post Keynesian concept of monetary sovereignty not only realistic and coherent with the PK approach on money, but that also takes into account the institutional framework of monetary and fiscal policies in force in most countries. This chapter proposes, firstly, a concept of monetary sovereignty alternative to the neo-chartalist one, but coherent with the Post Keynesian theory of money as well as with other key presuppositions of that approach, namely, realism, historical time and the crucial role of institutions. Secondly, it devises an analytical framework on the relationship between monetary sovereignty, currency hierarchy and policy space that takes into account the actual dynamics of the contemporaneous international monetary and financial system featured by a currency hierarchy and the asymmetries of financial globalisation (i.e., the interpenetration of national monetary and financial markets with the globalised market).