real-world economics review, issue no. 89
subscribe for free

Monetary sovereignty is a spectrum: modern
monetary theory and developing countries1
Bruno Bonizzi, Annina Kaltenbrunner and Jo Michell [University of Hertfordshire, UK;
University of Leeds, UK; University of the West of England, UK]
Copyright: Bruno Bonizzi, Annina Kaltenbrunner and Jo Michell 2019

You may post comments on this paper athttps://rwer.wordpress.com/comments-on-rwer-issue-no-89/

Abstract
Critics of modern monetary theory (MMT) have alleged that its conclusions rely on the“exorbitant privilege” enjoyed by the US in issuing the global reserve currency, andthus do not apply to developing and emerging countries (DECs). MMT proponents
deny this but have recently moderated earlier claims with the introduction of the ideaof a “spectrum of monetary sovereignty” (Tankus, 2018; Tcherneva, 2016). In thispaper, we assess claims made by MMT proponents regarding the application of MMT
to the problems faced by DECs. We argue that MMT proposals fall short of providing
a basis for effective development policy and that a broader conceptualisation ofdevelopment strategy is required, one that acknowledges that external constraints arelikely to bind over any plausible policy horizon and takes into account the constraints ahierarchical international monetary and financial system creates for DECs. We
conclude that while neo-chartalism provides useful insights in considering monetaryand legal arrangements, MMT adds little to the well-established heterodox andstructuralist development economics literature.
JEL Codes E40, F41, F62, O11
Key words modern monetary theory, development, currency hierarchy, balance of
payments

1. Introduction
The prominence achieved by modern monetary theory (MMT) is remarkable for a set of ideas
originating with heterodox economics scholars. This success is arguably due to a particularconfluence: the growing realisation that monetary policy in isolation cannot stabilise theeconomic system has provided an audience for ideas which have been promoted effectively
through the use of blogs and social media.
While discussion has largely focused on the application of these ideas in major developed
economies, particularly the US, proponents claim that MMT is a general theoretical frameworkthat applies widely, and is therefore relevant for all contemporary economic systems. In
contrast, critics have alleged that both MMT analysis and policy recommendations rely on the“exorbitant privilege” enjoyed by the US in issuing the global reserve currency, and thus do
not apply to other nations – developing and emerging countries (DECs) in particular (e.g.
Epstein, 2019). MMT proponents deny the allegation of limited applicability, but have recently
moderated earlier claims with the introduction of the idea of a “spectrum of monetary
sovereignty” (Tankus, 2018; Tcherneva, 2016), thus acknowledging that the position of states
within the international trading, financial and monetary system influences the degree of policy
autonomy available to governments.
DECs face widely acknowledged policy constraints relating to exchange rates, foreignexchange availability, and external and foreign-denominated debt obligations. MMT has a
1

The authors would like to thank Frances Coppola, Santiago Gahn and Malcolm Sawyer for helpfulcomments. All errors are our own.

46

real-world economics review, issue no. 89
subscribe for free

distinctive take on these issues, focusing in particular on the policy autonomy available tocountries that issue their own currency and operate flexible exchange rates and are therefore,
in the terminology of MMT, monetarily sovereign. MMT also claims to provide
recommendations for countries facing externally imposed constraints on policy, which isframed as achieving or increasing monetary sovereignty. These include fostering domestic
food and energy sufficiency through Employer of Last Resort (ELR) policies, ensuring low
domestic interest rates, and fostering development banks.
In this paper, we consider the MMT approach to open economy macroeconomics, and thefocus on monetary sovereignty in particular. We assess claims made by MMT proponents
regarding the application of MMT to the problems faced by DECs, and discuss whether the
MMT emphasis on achieving monetary sovereignty provides a sound basis for policy in thosecountries. We argue that, as defined by MMT, monetary sovereignty does not overcome thepolicy constraints faced by DECs, and that proposals for achieving monetary sovereignty fallshort of providing a basis for effective development policy. A broader conceptualisation ofdevelopment strategy is required, that acknowledges that external constraints are likely tobind over any plausible policy horizon and takes into account the constraints a hierarchicalinternational monetary and financial system creates for DECs. We conclude that while neochartalism provides useful insights in considering monetary and legal arrangements, MMT
adds little to the well-established heterodox and structuralist development economics
literature.

2. MMT and the balance of payments
It is not straightforward to summarise “what MMT says” on any given topic. MMT itself is hard
to characterise; it could reasonably be described as a school of economic thought, a group ofscholars, or a political campaign. Much of what comprises MMT is also to be found in otherheterodox traditions, Post-Keynesian economics in particular. The distinctive element of MMT
is neo-chartalism: MMT places particular emphasis on the role of the government in issuingand enforcing the money of account, and the power this bestows. In the following summary of
MMT views on open economy issues, we rely on writings and statements from core MMT
authors and spokespersons, and draw on the recently published MMT textbook (Mitchell etal., 2019).
MMT analysis of open economy issues, particularly those faced by DECs, is relatively scant.
In the recently published MMT textbook, a single chapter is devoted to the open economy,
alongside short case studies on balance of payments constraints, currency crises andexchange rate regimes. The discussion of exchange rate determination is conventional: the“real price of a hamburger” purchasing power parity theory is contrasted with interest parity(the authors note that neither provides a sufficient account of how exchange rates are
determined). A simple Keynesian open economy income-expenditure model is presented, inwhich net exports are a function of the real exchange rate. In the case studies, the authors
argue that there is no evidence linking budget deficits to serious currency crises.
None of the above distinguishes MMT from conventional analysis. There is divergence,
however, in MMT’s characterisation of the balance of trade: “Imports ... represent a real
benefit to residents. Exports represent a real cost ... It is obvious that the only motivation for a47

real-world economics review, issue no. 89
subscribe for free2

nation to export, is to gain foreign currencies” (Mitchell et al. 2019, pp. 374–375). The implicit
assumption is that, in the case of a trade deficit, it is sufficient to consider only the immediate
benefits of increased current consumption or accumulation of physical capital, while ignoring
the implications of the accumulation of cross-border financial positions; Mitchell goes so far as
to argue that cross-border liabilities do not need to be “paid back”: “A current account deficit
reflects the fact that a country is building up liabilities to the rest of the world. ... While it iscommonly believed that these must eventually be paid back, this is obviously false.” (Mitchell
2018a) This is a corollary of the assumption that current account deficits are always financedin the currency of the deficit country or that foreign currency can always be purchased,without adverse consequences, for the domestic currency:“A [current account deficit] can only occur if the foreign sector desires toaccumulate financial (or other) assets denominated in the currency of issue ofthe country with the [current account deficit]. This desire leads the foreigncountry (whichever it is) to deprive their own citizens of the use of their own
resources (goods and services) and net ship them to the country that has the[current account deficit], which, in turn, enjoys a net benefit (imports greaterthan exports). A [current account deficit] means that real benefits (imports)
exceed real costs (exports) for the nation in question” (Mitchell, 2018a).
For MMT, current account deficits are therefore not the result of domestic consumption andinvestment exceeding productive capacity or capability, but a reflection of foreign demand forfinancial assets: “If the other guy has a desire to net save in your currency, he has to earnthat currency by giving you goods and services” (Mosler, 2018). But the assumption thatexports are priced in foreign currency, while the liabilities associated with current accountdeficits – resulting from payments for imports for example – are denominated in the currencyof the deficit nation does not match the reality of the majority of the international trading andfinancial system. Even if countries can pay for their imports in domestic currency, this does
not necessarily imply explicit demand for the currency, but simply the acceptance of thatcurrency as means of settlement for a “real” transaction.
The MMT approach to the trade balance also downplays the aggregate demand, employment
and distributional consequences of export demand. Demand for exports may generate jobs
and income; the reason that MMT treats this as unimportant is that MMT claims that theemployment rate is a pure policy variable: “the government chooses the unemployment rate.
An elevated unemployment rate is always a political decision” (Mitchell, 2018a, emphasis inoriginal). Export demand is thus regarded as unnecessary to maintain aggregate demand.
The MMT corollary is that action to reduce current account deficits is misplaced: “themainstream view is that policy should be focused on eliminating [current account deficits].
This would be an unwise strategy” (Mitchell, 2010). Aside from the arguments above, thepoint seems to rest on the fact that action to reduce current account deficits is assumed tomean austerity: a loanable funds version of the twin deficits hypothesis regards a government
deficit as causing insufficient national saving, as recently suggested by former president ofFederal Reserve Bank of New York, Bill Dudley:

2“MMT emphasizes that in ‘real’ terms, imports are a benefit and exports are a cost. Floating thecurrency and relaxing capital controls allows a nation to enjoy more ‘benefits’ (imports) and fewer ‘costs’(exports)” (Wray, 2014).

48

real-world economics review, issue no. 89
subscribe for free“The U.S. trade balance depends primarily on how much the country as awhole spends, earns, saves and invests. Americans collectively spend morethan their income, which means that the country’s savings do not cover its
investment needs. To make up the difference, the country must borrow fromabroad … Together with higher caps on federal discretionary spending, the[Trump tax cuts] sharply increased the government budget deficit. Thiswidened the gap between domestic saving and investment, requiring evengreater foreign capital inflows – and a bigger trade deficit – to maintainbalance” (Dudley, 2019).
While we concur on the incoherence of this loanable funds analysis, and that fiscal
contraction is likely to be undesirable in many cases, this does not mean that current accountdeficits are never a problem and action should never be taken to address them, or that thisaction necessarily entails fiscal contraction. Further, current account positions do not tell us
much about patterns of financing, and are not indicative of financing problems per se (Borio
and Disyatat, 2011), but they may indicate problems with the structure of domestic aggregate
demand, and, in many countries, potential exposures to foreign currency shortages.

3. Monetary sovereignty and the open economy
The views outlined above on the balance of payments are derived from the main distinctive
contribution of MMT: the neo-Chartalist theory of money (Tcherneva, 2006). In this view there
are, at worst, only limited monetary and financial constraints on current accounts and trade,because of the power of government over the domestic monetary system. Indeed, “monetary
sovereignty” is the central framing concept of MMT: Tymoigne (2019) defines MMT as “atheoretical framework that aims at understanding how a monetarily sovereign government
operates”.
While there is some variance among definitions of monetary sovereignty provided by MMT
authors, there are three main elements: 1) the government issues the national currency and3
imposes tax liabilities in that currency 2) the currency is fully floating and non-convertible,4
and 3) the nation has no debt denominated in foreign currency.
On the first, MMT contends that in stipulating the instrument in which taxes, fines and otherobligations are to be discharged, a government can ensure the adoption of its chosen moneyof account. This neo-chartalist view, summarised as “money is a creature of the state” or“taxes drive money” is controversial, but space doesn’t permit extensive discussion here (seee.g. Parguez and Seccareccia, 2000; Mehrling, 2000; Fields and Vernengo, 2013). The
recently published MMT textbook claims that currency issuance and taxation are sufficient toensure widespread domestic use and acceptance of that currency:

3

Non-convertible in this context means that the government does not stand ready to convert theircurrency to any other, as is the case in fixed exchange rate regimes. The term is, confusingly, perhaps
more commonly used to refer to the opposite case: currencies that are not freely traded and are thus
confined to domestic transactions. See Mitchell (2009b) for discussion.
4“MMT describes and analyses the way in which ‘fiat monetary systems’ operate and the capacities thata government has within that system. It explains how monetarily sovereign states–that is, states thatissue their own currency, float it on international markets and only issue liabilities in that currency–cannever run out of money or become insolvent.” (Fazi and Mitchell, 2019).

49

real-world economics review, issue no. 89
subscribe for free

“We can conclude that taxes drive money. The government first creates amoney of account (such as the dollar), and then imposes tax obligations inthat national money of account. In all modern nations this is sufficient toensure that most debts, assets and prices, will be denominated in thenational money of account” (Mitchell et. al, 2019, p. 137, emphasis added).
Specific examples are provided: “Currency-issuing nations... such as Turkey, and Argentina
after it abandoned the currency board, ... created a currency for domestic use” (ibid. p. 325).
Elsewhere, however, Wray (2011) acknowledges that this will only hold for what he calls “thenormal case – let us say, in the US or the UK or Japan”:“These sovereign governments never find that they cannot buy something by
issuing their own currency... the situation can be different in developing
nations in which foreign currencies might be preferred for “private”
transactions… To be sure, the population will want sufficient domestic
currency to meet its tax liability, but the tax liability can be limited by tax
avoidance and evasion. This will limit the government’s ability to purchase
output by making payments in its own currency” (Wray, 2011).
Wray gives the example of a country that collects one twelfth of output in tax revenue, andexplains that this will enable the government, at a minimum, to “move one-twelfth of national
output to the public sector through its spending of the domestic currency” (i.e. to run abalanced budget), but in practice the government is likely to be able to spend more (i.e. run a
deficit). Little elaboration is provided on what determines how far beyond its tax base agovernment can spend, and where increases in the tax base reach a tipping point at whichcurrency demand becomes effectively unlimited and thus full monetary sovereignty isachieved.
The second precondition for monetary sovereignty in MMT is a fully floating exchange rate
5
regime. Tcherneva (2016) presents a six-level ranking of “modern monetary regimes” , inwhich “nonconvertible freely floating sovereign currency regimes (US, Japan, UK, Canada,most nations in the world)” (p. 19) are ranked at the top, with pegged floats, fixed exchange
rates, currency boards, dollarisation and monetary unions offering consecutively lower
6
degrees of monetary sovereignty. Tcherneva argues that,“In fully sovereign monetary regimes... the economic possibilities before anation with a freely floating nonconvertible national currency are constrainedlargely by political considerations and the availability of real resources toachieve those priorities, not by the availability of money” (Tcherneva, 2016,p. 20).
While the Mitchell et al. definition appears to claim that by imposing tax obligations in national
currency, governments are able to determine the denomination of debts directly, it is morecommon to include, as a precondition for monetary sovereignty, an explicit stipulation against
5

The “modern” in “modern monetary theory” modifies “monetary”, not “theory”: MMT is a theory of“modern monetary regimes”, not a modern theory of money.
6
Tcherneva’s claim that “most nations in the world” operate a floating exchange rate echoes Wray’s
description of this as “the normal case”; in reality a minority of countries operate systems classified by
the IMF as “floating” or “free floating” (IMF, 2018).

50

real-world economics review, issue no. 89
subscribe for freeforeign-denominated debt: “a monetary sovereign government does not need foreigners for its
finances… no sovereign government should be allowed (by its citizenry) to issue IOUs
7
denominated in a foreign currency” (Tymoigne and Wray, 2013, pp. 39-40).
MMT proponents argue that, for monetarily sovereign regimes, the government can, by
issuing currency, directly purchase anything that is for sale in that currency, including all idle
8
labour. This is the reason that, as previously noted, the level of employment is treated as apolicy variable:“…a nation that adopts its own floating currency can always afford to put
unemployed domestic resources to work. Its government will issue liabilities
denominated in its own currency and will service its debt in its own currency.
Whether its debt is held internally or externally, it faces no insolvency risk”(Mitchell et al., 2019, p. 517)
When discussing the implementation of MMT policy proposals, MMT proponents often
proceed on the assumption of full sovereignty, even for DECs: it is assumed that domestic
currency will be accepted without limit by both the domestic population and by the foreign
sector, either in direct exchange for goods and services or in foreign exchange transactions.
In a similar vein, foreign currency borrowing is presented as a domestic policy choice, rather
than an international structural constraint. As a result, both budget deficits and trade deficits
are argued to be essentially riskless for “most nations in the world”:“For a sovereign nation with a floating currency, a budget deficit is indefinitely
sustainable. Such a government, logically, does not and cannot spend tax
revenue. Even Turkey, with a budget deficit equal to 20 per cent or more ofGDP, logically does not and cannot ‘borrow’ from the private sector or foreign
sector. And, for such a country (even Turkey), both a budget deficit and acurrent account deficit are indefinitely sustainable” (Wray, 2006, pp. 117–
118).
Much of the MMT literature therefore proceeds as if external constraints on policy anddevelopment are self-imposed (Vergnhanini and De Conti, 2017): currency pegs should
simply be abandoned while foreign currency debt should be disallowed. Where the existenceof binding constraints is acknowledged, it is presented in semantic terms: dependence onfood imports is not a balance of payments constraint, it is the result of arbitrary lines drawn
across space:“It is true that a currency depreciation can be damaging for a nation that iswholly dependent on imported food. Note that this is not a balance of
payments constraint as it is normally considered. It is a real resource
constraint: insufficient domestic production of food. This can arise fromdomestic policy choices that are biased against the production of food crops,
or from the unequal distribution of resources across geographic space and7

Kaboub (2019a), gives a four-point definition of monetary sovereignty: (1) a country issues its own
sovereign currency (2) taxes, fines and fees are imposed in that currency (3) the country only issues
debt denominated in their own currency (4) the country operates flexible exchange rates.
8
Strictly speaking, governments don’t issue currency directly, treasury spending is financed by sellingbonds to the central bank. MMT tends to ignore this by – controversially – consolidating the two
institutions into a single entity when discussing government finance (see e.g. Lavoie, 2013).

51

real-world economics review, issue no. 89
subscribe for freethe somewhat arbitrary lines that have been drawn across space to delineate
sovereign states” (Mitchell et al., 2019, p. 508).
The refusal, by some MMT authors, to acknowledge the existence of balance of payments
constraints effectively dismisses the entire heterodox “balance of payments constrained
growth” literature. This literature originates with Thirlwall’s (1979) model, which demonstrates
that the relative income elasticities of demand for imports and exports can impose limits to the9rate of growth for a country, because beyond a certain growth rate import demand will rise10
faster than export demand:“There is nothing to distinguish so-called progressives who make thisargument from the neo-liberals at the IMF who also make it. Perhaps anuance is that progressives tend to focus on import-substitution policies toreduce the balance of payments constraint while the likes of the IMF focus on
11
expanding export potential” (Mitchell, 2016).
Although it is certainly the case that the breakdown of the Bretton Woods system and the shift
to flexible exchange rates and open capital accounts for many countries alters, and in somecases loosens, balance of payments constraints, in a world dominated by dollar-denominatedinvoicing and funding, for many these remain very real.
Some MMT proponents have recently taken a more nuanced position on monetary
sovereignty. While MMT has traditionally referred to a “hierarchy of money” (Bell, 2001;
Tchverneva 2016), this refers to the relationship between state money, private bank moneyand “near moneys”; the significance of an international currency hierarchy has received lessattention. It is therefore significant that Tankus (2018) introduces the terminology of a
“spectrum of monetary sovereignty” in which “monetary sovereigns” coexist with “monetary
subjects”. He argues that monetary sovereignty is mainly determined by the size of acountry’s foreign currency debt. A similar position is found in Tymoigne and Wray (2013), who
effectively describe an international currency hierarchy:“In the worst case, some countries have limited real and external financial
resources… and their government currency might not be accepted
externally… In the most favourable case, a country provides the international
currency and the rest of the world desires to save the international reserve
currency” (pp. 42-43).
Kaboub (2018; 2019a; 2019b) also concedes that DECs face limited monetary sovereignty,
as a result of domestic resource constraints. He argues for domestic policy measures toreduce DECs dependency on food and energy imports, and transform their economies into
9This dismissal is not universal: Kaboub (2018) effectively gives an exposition of the balance of
payments constrained growth model, but treats it as evidence that exports should be reduced.
10
Given that Thirlwall (2012) credits Prebisch (1950; 1959) as the “true forerunner” (p. 319) of hisbalance of payments constrained model, this also amounts to a dismissal of the structuralist literaturedeveloped by Prebisch and his associates.
11
Mitchell not only takes offence at the theory, but also at the habits of one of its key developers:“Nicholas Kaldor was one of those bourgeois socialist economists that Cambridge University seemed tonurture in the Post War period. He became a member of the House of Lords (Baron Kaldor of
Newnham) in 1974, a curious position for a ‘socialist’ to accept. The joke that was around when I was a
graduate student at Manchester University in the early 1980s was that he was so unfit and large that hehad had a chair on the landing between floors of the Economics building between the tea room and his
office so he could rest on the way back to his office after a nice English cup of tea” (Mitchell, 2016).

52

real-world economics review, issue no. 89
subscribe for freeproducers of high-value added industrial exports (these are discussed in more detail in thenext section).
In contrast, Fazi and Mitchell appear to deny the Tankus / Kaboub “spectrum” view:“…the core MMT developers do not... consider a ‘hierarchy of currencies’ with
the US dollar at the top, nor do they assume that non-dollar currencies have
only limited currency sovereignty. All currency-issuing governments enjoy
monetary sovereignty… A nation with limited access to real resources willremain materially poor. Sovereignty, though, means that it can use its
currency capacity to ensure that all available resources are always fully
employed” (Fazi and Mitchell, 2019).
MMT policy advice to developing countries likewise often downplays the binding external
constraints faced by so-called monetarily sovereign countries. Kaboub’s (2007) proposal for a
12
job guarantee programme for Tunisia provides an example. In discussing the open economy
constraints, he argues that,“The mainstream argument claims that there is no international demand for‘soft currencies’ like the TND or TND-denominated assets such as TNDdenominated bonds issued by the Tunisian Government… According to
Wray’s analysis (2006), the real meaning of a trade deficit is that the rest of
the world (ROW) wishes to net save TND-denominated assets, and that ‘thereal national cost of enjoying imports consists of the exports that must be
delivered’ (Wray 2006) ... If the Tunisian government adopts a flexible
exchange rate regime and allows free convertibility of the TND in international
exchange markets, then Tunisia can practically import anything it wants bysimply offering to exchange TNDs for whatever other currency is required forthat purchase. There will always be a demand for TNDs, albeit at a devalued
exchange rate” (Kaboub, 2007, pp. 21-22, 24).
The underlying assumption here is that the government should be able and prepared to
exchange domestic currency in FX markets at any exchange rate. However, as we discuss inthe next section, FX markets in DECs are often thin and one-sided, resulting in large
exchange rate movements. These can have severe consequences for inflation and external
debt servicing, both of which are recognised by MMT proponents as policy constraints. The
government could therefore find itself in the position of choosing whether to continue issuing
domestic currency to buy necessary imports, or preventing the exchange rate from collapsing.
Indeed, Wray and Tymoigne (2013) again provide more nuanced policy advice:“open economies are more sensitive to fluctuations in exchange rates andmay desire to curb exchange-rate fluctuations by pegging a currency… MMT
does recognize that some small open economies may benefit fromdollarization given that almost none of their economic activity is driven by thedomestic private sector and government spending” (p. 43).

12

A job guarantee (or more specifically an “employer of last resort”) proposal is the flagship policy of
MMT. See Mosler (1997–98); Wray (1998); and Tcherneva (2012)53

real-world economics review, issue no. 89
subscribe for free

There is therefore some variation amongst MMT authors on questions such as whether
resource-constrained countries should be considered to be monetarily sovereign, and evenon the existence of an international currency hierarchy. Even those who acknowledge DECs’lower position in the monetary hierarchy, fail to acknowledge the severe structural constraints
these countries’ subordinate position in the international productive and financial system
imposes on domestic policy making – in particular those aimed at productive structuraltransformation.

4. MMT, foreign exchange and finance for development
While some MMT authors deny the possibility of limited policy autonomy in the presence of afloating fiat currency (Caldentey and Vernengo, 2019), and therefore regard problems ofdevelopment as resulting entirely from resource constraints, more nuanced contributions do
acknowledge these limits. These are framed, in MMT terminology, as resulting from a lack ofmonetary sovereignty. In this section, we consider whether proposals to “increase monetary
sovereignty” are sufficient to provide policy autonomy to DEC governments and overcome
externally imposed constraints.
Kaboub (2018; 2019a; 2019b) argues that limited monetary sovereignty in DECs originates intheir lower economic development, because external borrowing in foreign currency and fixedexchange rates are imposed by the need to pay for food, energy, and industrial goods
imports. In this view, reclaiming full monetary sovereignty therefore depends on developing
energy and food self-sufficiency, as well as focusing the economy away from intermediate
good assembly manufacturing and commodity exports, which will in turn remove foreign
currency borrowing and need for managed exchange rates. Kaboub argues that MMT policies
can be used to achieve self-sufficiency in food and energy: a job-guarantee programme canbe used to direct labour resources towards agriculture and energy production.
With the possible exception of the job guarantee, these proposals largely parallel the traditionof old development economics, and industrial policy, which Structuralist and Post-Keynesian
economists have been advocating since the 1960s (e.g. Prebisch, 1949; Rodríguez 1981,
Sunkel and Paz, 1970), yet largely stop short of discussing a central issue in that literature:
how is industrialisation to be financed? In this literature, the limited policy autonomy of DECs
(at least partly, as we argue below) stems not only from their lower productive capacity but
also from their subordination in the global monetary and financial system. As Kaboub also
notes, industrial transformations take time. During the transformation process, there is an
ongoing need for foreign currency, to pay for those imports of technology and capital goods
that are necessary to develop food, energy and manufacturing production. The crux of thematter is: how to solve the inescapable need for foreign currency to achieve this structuralchange, if one is to avoid foreign currency borrowing? Some countries may be able to achieve
foreign currency financing at favourable terms, for example because of their geopoliticalimportance (see e.g. Yeung, 2017; Fischer, 2018). However, for the majority of countries thisis unlikely to be an option. Developing countries have therefore broadly three otherpossibilities open to them.
The first is to pursue a neo-mercantilist export-led strategy, and generate the necessary
foreign exchange through exports. However, this solution is potentially highly problematic. By
definition, many developing countries are poorly developed, shallow economies which arelargely import dependent, very often for basic foodstuffs, let alone more complex inputs for54

real-world economics review, issue no. 89
subscribe for freedomestic production. At the same time, and for the same reason, their export capacity is low
and often dependent on volatile commodities and low-value added intermediate goods. Thus,
aiming to reduce their imports in line with their export capacity will seriously undermine any
development effort and domestic living standards. Moreover, the real exchange rate
devaluation required to generate such a boost to domestic exports might be technicallyinfeasible (due to a low price elasticity of exports), or politically impossible if it requires
subdued wage growth and generates inflationary cost-push pressures. Finally, there is theglobal argument: not all countries can run current account surpluses. If, however, we have asituation - which characterises the current international configuration to a substantial extent where countries with developed economic structures and strong currencies (see ourargument later on) can run current account deficits and “live beyond their means”, whereas
DECs with weak currencies cannot and are thus bound to “live within their means”, this raises
obvious questions about equity.
A second set of solutions is to obtain foreign currency though the financial account, i.e.
through “capital flows”, which do not create foreign currency debt liabilities. This could bedone either through long-term equity-like flows in the form of FDI or foreign investments inliquid domestic currency-denominated assets such as stocks and bonds. As argued by
Kaltenbrunner and Painceira (2015), such investments continue to bear considerable risks
and are therefore not a way of increasing monetary sovereignty. The resulting currency
mismatch of these operations makes foreign investors very sensitive to expected exchange
rate changes which can result in large and volatile asset price and exchange rate movements.
This means that even in the case of domestic currency liabilities held by foreign investors,
governments cannot neglect the exchange rate which limits their policy autonomy. Attracting
FDI, as opposed to loans or portfolio flows, might have stabilising short-term implications, but,as Kaboub also notes, might encourage a race to the bottom as countries compete for foreign
investments, as well as locking their productive structure firmly into a subordinate position.
Moreover, FDI potentially creates future pressures on the balance of payments in the form of
dividends and remittances.
Finally, DECs could rely on domestic financing to promote the structural change necessary to
reduce the foreign exchange constraint and reliance on foreign (currency) borrowing. Tankus(2018) recommends the promotion of domestic credit through low interest rates and national
development banks (he mentions the Brazilian National Development Bank, BNDES, as an
example; a similar proposal is put forward by Rezende, 2015, for Brazil, although not explicitly
in the context of achieving monetary sovereignty). This domestic financing would then be
exchanged into foreign currency on the foreign exchange market to buy the necessary
imports. To cover temporary import needs (e.g. for trade credit and short-term dollar
financing), Tankus recommends the development of regional payment systems. While we are
sympathetic to these suggestions, serious constraints remain which are largely related to
DECs’ subordinate position in an asymmetrically structured international monetary andfinancial system (e.g. Andrade and Prates, 2013; Kaltenbrunner, 2015; Bonizzi, 2017; Allami,2018). Indeed, it is this hierarchic and asymmetric structure of the international monetary andfinancial system, we argue, which (in addition to the productive subordination highlighted bye.g. Kaboub, 2018 and Wray and Tymoigne, 2013) constrains attempts to achieve monetary
sovereignty in DECs.
First, in addition to their foreign exchange constraint, many DECs face considerable domestic
financing constraints: the private financial system is not prepared to provide low-cost,
domestic currency financing. In a global economy, where private actors can decide between
55

real-world economics review, issue no. 89
subscribe for freeholding different currencies, an inherent hierarchy emerges among them. Financial institutions
will prefer currencies which best perform international money functions, currently led by the
dollar. Other currencies, or assets denominated in those currencies (such as domestic bankloans), will have to compensate their inability to perform international monetary functions withhigher returns (e.g. interest rates). Additionally, the domestic financial system simply might
not be sufficiently institutionally capable of providing long-term “patient” financing fordevelopmental, structural change in DECs. Conversely, as discussed in more detail below,
private actors might be unwilling to borrow or hold domestic currency assets such as
deposits, whose value is perceived to be excessively volatile. For all these reasons, long-term
credit for development is simply not available in many DECs. MMT authors partly
acknowledge this restriction and suggest the use of development banks and direct monetaryfinancing by the central bank. We are sympathetic to these proposals, which could in somecases reduce the domestic financial infrastructural gap, increase the circulation of domestic
currency and promote the development of credit markets in domestic currency. However, atleast in the medium term, the need to pay for capital goods and technology in foreign
currencies remains. Therefore the success of such solutions remains contingent on the abilityof the local currency to be exchanged internationally to buy foreign currency.
This brings us to a second constraint to domestic financing of development in DECs, briefly
mentioned in the previous section. In large developed economies deep and liquid foreignexchange markets and powerful banks allow agents to exchange domestic currency into
foreign currency routinely. This is not as simple in DECs characterised by thinner foreignexchange markets and currencies lower down the international hierarchy. Foreign agents areless willing to exchange foreign into DEC currencies to finance foreign exchange shortfalls.
Flexible exchange rate regimes are no cure for this problem. The “virtue” of flexible exchange
rates seems to be predicated on the notion that the foreign exchange market will quickly finda new lower clearing price as demand for a currency falls, but in many DECs quantity
constraints might prove tremendous: if foreigners and domestic agents want to exchange
domestic currency for US dollars, it will take a mighty fall in the price of domestic currency tostimulate any actor to buy it. As Coppola (2018) notes,“the world is littered with examples of countries that have had to run down
public sector FX reserves to provide dollar liquidity to local banks andcorporations after they are effectively shut out of global markets by local
currency depreciation… in an FX crisis, private sector debts become public
sector external debt.”
This is particularly the case if foreign currency is needed to finance risky, structuraltransformations in a global order predefined by developed countries as early movers.
However, it might even be problematic in the case of temporary current account deficits due
to changing international food and energy prices. Indeed, no country in this world is entirely
energy and food sufficient, which means except the US (which can buy for most of its imports
in its domestic currency) every country in the world is at least temporarily foreign exchange
constrained. This is not a problem for developed countries with deep and liquid foreignexchange markets, whose currencies sit on the top of the international currency hierarchy. Itis, however, a problem for DECs characterised by monetary and financial subordination.
Finally, in the extreme case, DECs’ monetary subordination might not only mean that foreign
nationals refuse to accept the domestic currency, but even domestic actors might substitutethe domestic currency for a foreign currency, at least for some functions. Historically this has
56real-world economics review, issue no. 89
subscribe for freebeen observed particularly in the case where domestic agents hold their wealth in a foreign
currency (Argentina is a good example). This, in turn, seriously undermines the ability of thedomestic banking system to provide domestic currency financing because domestic currency
loans are frequently transformed into foreign currency deposits, which creates destabilising
currency mismatches in the banks’ balance sheets. Thus, any domestic currency financing at least in the presence of low levels of monetary sovereignty – would have to becomplemented by domestic foreign exchange regulations which forbid the use of a foreign
currency in the domestic economy (which have indeed existed in Brazil for a long time) andcapital controls to avoid flight into a foreign currency.

5. Conclusion
In the terminology of MMT, a monetarily sovereign government is one for which there is norisk of technical default on its debt; “monetary sovereignty” is thus a synonym for“macroeconomic policy autonomy”. Historically, MMT has largely focused on how to
implement policy in a situation of full policy autonomy. The limits to that assumption for many
DECs are acknowledged by recent contributions noting that “monetary sovereignty is aspectrum”. But this is just another way of saying that the policy space available togovernments varies, and that DECs face binding external constraints on policy; this is hardly
a novel observation.
What matters, instead, for DECs is how to implement policy under conditions of limited
autonomy, and the measures that can be taken to increase the degree of policy autonomy
available. On these, the MMT literature does not make a substantial contribution. Moreover,the contributions that do exist do not, in our view, sufficiently acknowledge the structural
constraints imposed by a hierarchical international monetary and financial system on
successful structural transformation.
Firstly, the threefold criteria identified by MMT – the currency issuer imposes means ofsettlement of tax obligations, operates flexible exchange rates, and has no foreign currency
debt – are insufficient to achieve policy autonomy (see also Caldentey and Vernengo (2019)
for a similar argument). Even if these criteria are met, nations may still face foreign exchange
shortages. In particular, we showed that the MMT assumptions about the willingness of theforeign sector to hold domestic currency, or of currency devaluation to act as an equilibrating
mechanism are highly problematic in the case of DECs. DECs face a hierarchical world
economy; they remain structurally subordinated in global production chains, reliant on volatilecommodity exports, and import dependent for food and energy. Foreign exchange markets
are not sufficiently developed to ensure liquidity and are also embedded in a hierarchicalinternational system where the dollar continues to dominate invoicing and funding. In thiscontext, currency devaluations can be prohibitively costly. An argument could be made thatthe causality between monetary sovereignty and exchange rate flexibility is the reverse:
developed countries, with deep financial markets and well developed monetary and financial
markets and institutions, whose currency is widely used and traded, can safely implement
floating exchange rate regimes; others have no choice but to operate some form of managed
13
exchange rate.

13

This has also been acknowledged in a large literature known as “fear of floating” (e.g. Calvo &Reinhart, 2000; McKinnon and Schnabl, 2004).

57

real-world economics review, issue no. 89
subscribe for free

Secondly, while many of the proposals made by MMT proponents aimed at increasing thepolicy autonomy of DEC governments, such as increasing self-sufficiency in food and energy
and increasing capacity for domestic credit expansion, are sensible, they are already wellestablished, and more thoroughly explored, in the structuralist heterodox development
economics literature. Where MMT diverges from this literature is in advocating monetisationof deficits and implementation of job guarantee schemes.
The efficacy of direct monetary financing is ultimately dependent on the willingness of both
the domestic private sector and the foreign sector to hold domestic currency; as alreadynoted, the sanguine assumptions made by MMT proponents about such demand arequestionable in the case of DECs. Direct monetary financing is unlikely to be appropriate forfunding long-term capital investment, while domestic financial institutions might not have thecapacity to implement such a policy. Advocating deficit monetisation under conditions ofsustained current account deficits, exchange rate volatility and potential capital flight is at best
misguided and at worst irresponsible. The recent experience of Argentina – despite being
identified by Mitchell et al. as a “currency issuing nation” – is a case in point (see Bortz andZeolla, 2018).
Successful development requires a combination of strategies. Greater reliance on domestic
financing as part of industrial policy is likely to play a role, although this will require carefulconsideration of the appropriate institutional forms. Recent MMT contributions advocate thepromotion of domestic credit through low interest rates and national development banks(Tankus, 2018; Liang, forthcoming). Such strategies will however need to be combined withsome degree of controlled foreign borrowing, alongside strategic trade openness – and amore sophisticated understanding of the role of trade in development than “exports are a cost,
14
imports are a benefit”. Domestic regulations on the use of foreign currencies and amanaged financial account are likely to be necessary in order to avoid excessive foreign
currency debt and instability arising from volatile capital flows and domestic currency
substitution, which could derail any development strategy.
This remains, however, nothing more than a starting point for a successful development
strategy, where foreign exchange remains a constraint. This is so, because DECs face aworld economy connected by an asymmetric and hierarchical international monetary andfinancial system. As long as one, or indeed a few, core currencies continue to dominate theinternational monetary system for invoicing and funding, for many DECs the problem ofachieving full policy autonomy will remain extremely challenging. While it is possible for some
DECs to improve their relative position and reduce the extent of their current subordination, it
is likely that monetary hierarchies will remain for the foreseeable future. To overcome thisglobal power structure and achieve true policy autonomy for all nations will require major
reform of international systems of governance and cooperation as well as global and regional
financial and monetary systems. It is not yet clear whether MMT acknowledges this.

14“If we are to advance the economic interests of the bulk of the citizenry in a decent and humane
fashion, we must promote a full employment policy domestically, and couple this with a flexible
exchange rate regime internationally. With these institutions in place (on a global scale), exports
become a cost and imports a benefit, and the conditions under which free trade is beneficial will havebeen established” (Bell and Henry, 2003, p. 24).

58

real-world economics review, issue no. 89
subscribe for free

References
Alami, I. (2018) “On the terrorism of money and national policy-making in emerging capitalist
economies.” Geoforum, 96, pp. 21-31.
Bell, S. (2001) “The role of the state and the hierarchy of money.” Cambridge Journal of Economics 25,
no. 2, pp. 149-163.
Bell, S. and Henry (2003) “When Exports Are a Cost and Imports Are a Benefit: The Conditions Under
Which Free Trade is Beneficial”, CFEPs working paper no. 26, http://www.cfeps.org/pubs/wp-pdf/WP26HenryBell.pdf
Bonizzi, B. (2017) “An Alternative Post-Keynesian Framework for Understanding Capital Flows to
Emerging Markets.” Journal of Economic Issues, 15(1), pp. 137-162.
Borio, C. and P. Disyatat (2011) “Global imbalances and the financial crisis: Link or no link?” Bank forInternational Settlements, Working Paper 346, May.
Bortz, P. & Zeolla, N (2019) “Argentina: from the confidence fairy to the (still devilish) IMF”, blog:
https://criticalfinance.org/2018/05/17/argentina-from-the-confidence-fairy-to-the-still-devilish-imf/.
Caldentey Perez, E., & Vernengo, M. (2019). Modern Monetary Theory (MMT) in the Tropics: Functional
Finance in Developing Countries. PERI Working Paper, 495.
Calvo, G., & Reinhart, C. M. (2000) F”ear of Floating.” NBER Working Paper, 7993.
Coppola, F. (2018) “The myth of monetary sovereignty”, blog:
http://www.coppolacomment.com/2018/11/the-myth-of-monetary-sovereignty.html.
Dudley, B. (2019) “Why the U.S. Trade Deficit Keeps Growing.” Bloomberg, March.
https://www.bloomberg.com/opinion/articles/2019-03-15/why-the-u-s-trade-deficit-is-growing.
Epstein, G. (2019) “Is MMT ‘America First’ Economics?” INET blog:
https://www.ineteconomics.org/perspectives/blog/is-mmt-america-first-economics.
Fazi, T and W. Mitchell (2019) “For MMT.” Tribune: https://tribunemag.co.uk/2019/06/for-mmt.
Fields, D., & Vernengo, M. (2013). Hegemonic Currencies during the Crisis: The Dollar versus the Euroin a Cartalist perspective. Review of International Political Economy, 20(4), 740-759.
Fischer, A. M (2018) “Debt and development in historical perspective: The external constraints of lateindustrialisation revisited through South Korea and Brazil.” The World Economy 41(12), pp. 3359-3378.
IMF (2018) De Facto Classification of Exchange Rate Arrangements https://www.elibraryareaer.imf.org/Documents/Exchange%20Regimes%20and%20Monetary%20Anchors/ExchangeRegime
sandMonetaryAnchors_2018.pdf
Kaboub, F. (2007) “ELR-led economic development: A plan for Tunisia.” Levy Institute Working Paper
499.
Kaboub, F. (2018) “Fadhel Kaboub of the Binzagr Institute - MUST Listen!”, Hopping Mad podcast,available at: https://www.buzzsprout.com/50892/659073-fadhel-kaboub-of-the-binzagr-institute-mustlisten?client_source=twitter_card&player_type=full_screen
Kaboub, F. (2019a) “Monetary Sovereignty, Colonialism and Independence”, The MMT Podcast,https://pileusmmt.libsyn.com/12-fadhel-kaboub-monetary-sovereignty-colonialism-and-independence
Kaboub, F. (2019b) “This Is How MMT Applies to Emerging Markets”, podcast, Bloomberg, available at:https://www.bloomberg.com/news/audio/2019-04-05/this-is-how-mmt-applies-to-emerging-marketspodcast
Kaltenbrunner, A. (2015) “A Post Keynesian Framework of Exchange Rate Determination: A Minskyan
Approach.” Journal of Post Keynesian Economics, 38(3), pp. 426-448.
Kaltenbrunner, A., & Painceira, J. P. (2015) “Developing Countries’ changing Nature of Financial
Integration and New Forms of External Vulnerability: the Brazilian experience.” Cambridge Journal of
Economics, 39(5), pp. 1281-1306.

59real-world economics review, issue no. 89
subscribe for freeKing, J.E. (2001) “The last resort? Some critical reflections on ELR.” Journal of Economic and Social
Policy, 5(2), pp. 72-76.
Lavoie, M. (2013) “The monetary and fiscal nexus of neo-chartalism: a friendly critique” Journal of
Economic Issues, 47(1), pp. 1-32.
Liang, Y. (forthcoming) “Implications of Modern Money Theory on Development Finance.” In Bonizzi, B.,
Kaltenbrunner, B. and Ramos, R. A. (eds) Financial integration and instability in emerging economies:
the contribution of Post-Keynesian analysis.
McKinnon, R., & Schnabl, G. (2004) “The East Asian Dollar Standard, Fear of Floating and Original Sin.”
Review of Development Economics, 8(3), pp. 331-360.
Mehrling, P. (2000)” Modern money: fiat or credit?” Journal of Post Keynesian Economics, 22(3), pp.
397-406.
Mitchell. W. (2009a) “Modern monetary theory in an open economy.” Blog:
http://bilbo.economicoutlook.net/blog/?p=5402
Mitchell, W. (2009b) “Gold standard and fixed exchange rates – myths that still prevail.” Blog:
http://bilbo.economicoutlook.net/blog/?p=2562
Mitchell, W. (2010) “Twin deficits – another mainstream myth.” Blog:
http://bilbo.economicoutlook.net/blog/?p=11527
Mitchell, W. (2016), “Balance of payments constraints.” Blog:
http://bilbo.economicoutlook.net/blog/?p=32931
Mitchell, W. (2018a) “MMT and the external sector – redux.” Blog:
http://bilbo.economicoutlook.net/blog/?p=40433
Mitchell, W., Wray, L.R., Watts, M. (2019) Macroeconomics. London: Red Globe Press.
Mosler. W. (1997-98) “Full Employment and Price Stability.” Journal of Post Keynesian Economics
20(2), pp. 167-82.
Mosler, W. (2018) “Real Progressives debate with Warren Mosler and Steve Keen” Available from:https://www.youtube.com/watch?v=TRtzLTl4j1A
Parguez, A., Seccareccia, M. (2000) “The credit theory of money: the monetary circuit approach” In:
Smithin, J. (ed.), What is Money? London and New York: Routledge, pp. 101-123.
Prates, D. M., & Andrade, R. (2013) “Exchange Rate Dynamics in a Peripheral Monetary Economy.”
Journal of Post Keynesian Economics, 35(3), pp. 399-416.
Prebisch, R. (1949) El Desarollo Economico de America Latina y algunos de sus principales Problemas.
Santiago de Chile: CEPAL.
Prebisch R. (1950) The economic development of Latin America and its principal problems, New York:ECLA, UN Department of Economic Affairs.
Prebisch R. (1959) “Commercial policy in the underdeveloped countries.” American Economic Review,
Papers and Proceedings, May.
Rezende, F. (2015) “Why does Brazil's banking sector need public banks? What should BNDES do?”PSL Quarterly Review, 68(274), pp. 239-275.
Rodríguez, Octavio (1981) La Teoría del Subdesarrollo de la Cepal. Siglo Veintiuno, Mexico.
Sawyer, M. (2003) “Employer of last resort: could it deliver full employment and price stability?” Journalof Economic Issues, 37(4), pp. 881–907.
Sunkel, Osvaldo, and Pedro Paz (1970) El Subdesarrollo Latinoamericano y la Teoría del Desarrollo.
Siglo Veintiuno, Mexico.
Tankus, N. (2018) “Monetary Sovereignty and Our Dollar World.” Manchester International Law Centre
Speaker Series, 6 June 2018. Available at: https://www.youtube.com/watch?v=xZnEDrVfcHU

60

real-world economics review, issue no. 89
subscribe for freeTcherneva, P.R. (2006) “Chartalism and the Tax-Driven Approach to Money.” In P. Arestis and M.
Sawyer (eds.) Handbook of Alternative Monetary Economics. Northampton. MA: Edward Elgar.
Tcherneva, P.R. (2012) “Employer of Last Resort.” In J.E. King (ed.) The Elgar Companion to Post
Keynesian Economics. Northampton, MA: Edward Elgar.
Tcherneva, P.R. (2016) “Money, power, and monetary regimes.” Levy Economics Institute, Working
Paper, (861).
Thirlwall, A. P. (1979) “The balance of payments constraint as an explanation of the international growthrate differences.” PSL Quarterly Review 32, no. 128.
Thirlwall A.P. (2012) “Balance of Payments Constrained Growth Models: History and Overview.” In:
Soukiazis E., Cerqueira P.A. (eds) Models of Balance of Payments Constrained Growth. Palgrave
Macmillan, London
Tymoigne, E. “MMT Basics with Eric Tymoigne.” Macro n Cheese podcast, available from:https://player.fm/series/macro-n-cheese/mmt-basics-with-eric-tymoigne
Tymoigne, E. and Wray, L.R. (2013) “Modern money theory 101: a reply to Critics.” Levy Economics
Institute Working Paper No. 778
Vergnhanini, R. and De Conti, B. (2018) “Modern Monetary Theory: a criticism from theperiphery.” Brazilian Keynesian Review, 3(2), pp.16-31.
Wray, L.R. (1998) Understanding Modern Money: The Key to Full Employment and Price Stability.
Cheltenham, UK: Edward Elgar.
Wray L. R. (2006) “Comments on Kelton, S. and Wray, L. R. ‘What a Long, Strange Trip It’s Been: Can
We Muddle Through Without Fiscal Policy?’ In L.-P. Rochon and Gnos, C., (eds.) Post-KeynesianPrinciples of Economic Policy. Cheltenham: Edward Elgar.
Wray, L.R. (2014) “MMT and external constraints.” Blog:
http://neweconomicperspectives.org/2014/02/mmt-external-constraints.html.
Wray, L.R. (2011) “What If the Population Refuses to Accept the Domestic Currency?” MMP Blog #9:
http://neweconomicperspectives.org/2011/07/mmp-blog-9-what-if-population-refuses.html.
Yeung, E.W. (2017) “Rethinking the East Asian developmental state in its historical context: finance,
geopolitics and bureaucracy.” Area Development and Policy, 2(1), pp. 1-23.

Author contact: Jo.Michell@uwe.ac.uk, A.Kaltenbrunner@leeds.ac.uk, b.bonizzi@herts.ac.uk___________________________SUGGESTED CITATION:
Bonizzi, Bruno, Annina Kaltenbrunner and Jo Michell (2019) “Monetary sovereignty is a spectrum: modern monetary
theory and developing countries.” real-world economics review, issue no. 89, 1 October, pp. 46-61,
http://www.paecon.net/PAEReview/issue89/Bonizzi-et-al89.pdf
You may post and read comments on this paper at https://rwer.wordpress.com/comments-on-rwer-issue-no-89/

61