Thursday, June 23, 2022

Modern Money Theory in the Tropics: A Reply to Agustin Mario

Our reply to a very inaccurate discussion of our views on MMT by Agustin Mario. From the abstract:

This paper responds to some inaccuracies on the discussion of our views on Modern Money Theory (MMT), as discussed by Agustin Mario. We believe that while is correct in noting that autonomous spending generates taxes, and fiscal balances are a result, MMT authors overlook the difficulties in pursuing expansionary fiscal policy in the developing countries. These are limited by the existence of an external constraint that cannot be solved with a flexible exchange rate policy regime. Foreign reserves and capital controls are needed.

In particular, I want to emphasize that the notion that we said in any place, or that it is implied that Esteban and I believe in supply side constrained growth is preposterous, and is either done in bad faith or complete ignorance. The main issue again is that we do not believe in free capital mobility and flexible exchange rates for developing countries, something that apparently Warren Mosler was defending down in Argentina a few weeks ago, asking for lower rates of interest, floating rates and fiscal expansion in complete disregard of the inflationary and contractionary impact that devaluation would have, and the limits imposed on fiscal expansion.

I also want to emphasize this particular reply to Mario:

Mario (2021, 364) says that “[t]o borrow in foreign currency is not a need but a policy choice.” The naïve conclusion is that debt in foreign currency can be completely avoided. The argument is akin to suggesting that breathing in an environment that is polluted is not necessary, just a decision, even if one lives next to a polluting factory and is too poor to move. Developing countries must import intermediary and capital goods, by their nature of being behind in the technological development ladder and being integrated into the complex division of labor of the modern world economy. That is unavoidable, and not a policy choice. Countries that are excluded, by the imposition of sanctions by the United States show the alternative. Developing countries should, obviously, minimize the amount of foreign debt they incur, and this should be at a level that is sustainable, with exports growing faster than the interest rate on foreign debt (Cline and Vernengo 2016).

And that is why reserves matter. This phrase, that we cite again, is something that no economist from a developing country would have written, for obvious reasons: 

on a floating exchange rate, a government does not need to fear that it will run out of foreign currency reserves (or gold reserves) for the simple reason that it does not con- vert its domestic currency to foreign currency at a fixed exchange rate.

In our view, exchange rates should be managed (and that implies raising interest rates to preclude depreciations sometimes is required), capital controls and accumulation of reserves are a must, and fiscal policy should be pursued to the limit of the external constraint.

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