Modern Monetary Theory Non Modern - Sigh
I volition commencement off yesteryear noting that he is in all probability right inward diagnosing that some online comments describing the details of monetary operations are non helpful for advancing the MMT case. In some contexts (as I complaint below), monetary operations affair -- but they tin hold upwards a distraction for a nifty many noun debates.
Think Of It As The Theory Of "Modern Money"
Saying that in that place is really footling novel nearly MMT is a measure mischaracterisation of MMT. The work seems to hold upwards the purpose of the discussion "Modern" inward the name; in that place are 2 explanations for it.- This refers to a joke yesteryear Keynes regarding Chartalism: nosotros conduct maintain had "modern" authorities coin for thousands of years.
- The wording is ambiguous, ane could homecoming it every bit "The Theory of Modern Money," where "modern money" is coin that is non defined with honor to an external shop of value. (Note the championship of Randall Wray's volume -- Understanding Modern Money -- which is consistent with this interpretation.) Since the major currencies were (implicitly or explicitly) pegged to gilt upwards until the early on 1970s, those of us a for sure historic catamenia tin mean value of floating currencies every bit "modern."
The top dog MMT authors province that MMT is a torso of thought inside the wide tent of post-Keynesian theory. One tin fence that it is unfair to generalise nearly "mainstream economics" (Professor Wren-Lewis implicitly states this inward his article, catch below), every bit in that place are differences of sentiment nearly policy inside the "mainstream" tradition. The exact same thing is truthful for post-Keynesian economics, which is why MMT needed a label to distinguish itself from other post-Keynesians.
This is non a child problem. MMT'ers together with many other groups of post-Keynesians are seriously divided over the importance of the "external constraint," nosotros require to conduct maintain to conduct maintain labels for these groups inward venture to brand feel of such internal debates.
To what extent the MMT authors are developing novel theory versus edifice on existing post-Keynesian thought is an interesting debate for academics, but is non of crucial importance for those of us who are non obsessed nearly citations inward the literature.
Sigh. Mathematics.
Simon Wren-Lewis:
MMTers also appear curiously averse to equations.
This is touching upon a rather raw nervus for me. I reach non similar arguments from authority, together with and thence I reach non dwell besides much upon my background. However, I volition complaint that conduct maintain an splendid academic pedigree inward applied mathematics.
In my opinion, the post-Keynesian authors that I am most familiar with conduct maintain a realistic mental attitude with regards to the application of mathematical models to economics, together with the purpose of mathematics inside papers meets the standards of applied mathematics (which is less formal than pure mathematics, but tin hold upwards translated into a to a greater extent than formal version). I am much less impressed with the purpose of mathematics inward the (mainstream) DSGE literature.
My writing hither is informal, together with I avoid the purpose of equations inward such writing -- just every bit I was told yesteryear my supervisor (who had a grooming inward pure mathematics). For example, I was able to give a basic agreement of how sampling destroys data with a graphical illustration (and no equations) inward this article. It would conduct maintain been slowly to regurgitate pages of frequency domain mathematics to explicate the concept (and it would hold upwards necessary for a formal treatment). However, I dubiety that the mathematics would hold upwards helpful for anyone who does non already conduct maintain a practiced grasp of such techniques. If I were writing an academic article, I mightiness hold upwards forced to purpose to a greater extent than formal mathematics, but that would hateful a much smaller potential readership.
Default Fears Not Just "Mediamacro"
Wren-Lewis:
This raises the inquiry of why MMT seems to conduct maintain quite a following. Perhaps it is a reaction to mediamacro’s frequently implicit supposition that a Blue Planet similar the United Kingdom of Great Britain together with Northern Ireland or USA could teach bust through a forced default. And, to hold upwards fair, some mainstream economists appear to desire to exceed away along that misapprehension alive, spell others conduct maintain the existence of independent key banks every bit a binding constraint.
I mean value he correctly pins downward why MMT has a cult next with people inward fixed income (like myself; Edward J. Delzio is some other example, I reviewed his volume The National Deb(i)t here) -- it explains why floating currency sovereigns reach non default. Fixed income practitioners conduct maintain seen people getting their faces ripped off for decades as they shorted the JGB market. In practice, MMT is the alone visible schoolhouse of thought that offers a coherent explanation.
To hold upwards fair to Professor Wren-Lewis, he's been largely right on financial policy. (I am ambivalent towards his academic theories nearly financial policy, such every bit described in my summary of "optimal financial policy.") He was non worried nearly forced default. That simply tells us that ane should never brand generalisations; non all "mainstream" economists handgrip with each other. That said, "mainstream" academic economists at universities are grooming almost all of the people who move into finance or supra-national agencies (which conduct maintain produced innumerable reports predicting bankruptcy inward diverse developed countries with floating currencies). If the bulk of "mainstream" academics are on the right side of the inquiry of sovereign default, in that place has been a massive failure of pedagogy.
The Budget Constraint Is The Wrong Answer
Wren-Lewis:
For representative MMTers seemed to mean value that they had discovered that a authorities with its ain key depository financial establishment require never default on its debt, but every bit far every bit I was concerned that was a measure together with rather trivial implication of the government’s consolidated budget constraint.
The measure governmental budget constraint is an equation that holds under the supposition that default cannot happen. If nosotros let for the possibility of default, the constraint no longer holds; nosotros require to adjust the equation to let for the loss of value on authorities bonds. It is straightforward that nosotros cannot apply a mathematical model to a instance that the model assumes is impossible.
To approximate the odds of a floating currency default, nosotros require to expect at the institutional (operational) arrangements around sovereign borrowing. Which is just what MMT does, together with the measure mathematical frameworks used inward DSGE reach not. (There are thousands of DSGE models out there; I would non hold upwards surprise if some researcher used ane to brand observations nearly authorities default. I conduct maintain non seen such a model, but I conduct maintain my doubts that they could teach it to work. Sovereign default is a political judgement, non a rational decision.) Once nosotros exclude the possibility of default, in that place is really footling to distinguish MMT together with the mathematics of DSGE models -- since both reverberate the same underlying accounting reality. I conduct maintain remarked upon that similarity inward previous articles.
Central Bank Independence Debate Shows MMT Non-Empty
He wrote:
This seemed to Pb to ideas that I thought were measure bits of macroeconomics
Professor Wren-Lewis had an article "Central Bank Independence together with MMT" (published inward September 2015). He notes that MMT proponents say that "central depository financial establishment independence is a sham," whereas the mainstream is greatly excited nearly the importance of the concept.
Although he disagrees with the MMT view, the fact that he was having a debate nearly a rather esoteric theoretical theme tells us that MMT is non simply next "standard bits of macroeconomics."
Concluding Remarks
I am non going to response to his comments nearly how MMT thinks nearly money-financed expenditures. I would characterise the MMT pose every bit non existence massively dissimilar than how he mightiness mean value nearly the issue, other than the terminology. The reality is that MMT questions a lot of hidden assumptions that are embedded inward mainstream models. It would conduct maintain some fourth dimension to interpret the MMT declaration into terminology that he would hold upwards happy with. Although I believe that it tin hold upwards done, I teach out that business to somebody else.
Although it would hold upwards squeamish for a dialogue betwixt myself together with some mainstream economists, I am non peculiarly hopeful that it volition occur. If I catch anything useful that tin hold upwards taken from mainstream theory, I volition conduct maintain payoff of it. Until such a time, I prefer to develop my ain enquiry programme inside the wide post-Keynesian tradition.
See Also:
(c) Brian Romanchuk 2015
No comments