Addressing the Balance of Payments Constraint: An MMT Response to David Fields
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Addressing the Balance of Payments Constraint
This article endeavours to engage with Fields’ critique by presenting arguments from a Modern Monetary Theory perspective. Modern Monetary Theory (MMT) has gained significant traction in recent years, offering a novel perspective on fiscal policy, government debt, and monetary operations (Kelton 2020). However, despite its increasing popularity, MMT is not without its critics. One prominent critique comes from Prof. David Fields, who argues that MMT may overlook the balance of payments constraint and suggests that capital controls should be primary rather than flexible exchange rates (Fields 2022).
First, MMT emphasizes the role of exchange rate adjustments in mitigating the effects of balance of payments constraints. According to MMT, floating exchange rates allow a country’s currency to appreciate or depreciate in response to changes in external demand, which can help address trade imbalances and maintain macroeconomic stability. While it is true that currency speculators and other factors can sometimes distort exchange rates, MMT does not dismiss the importance of exchange rate management in addressing external shocks and mitigating the impact of balance of payments constraints.
Second, MMT does not necessarily reject the use of capital controls as a policy tool. In fact, some MMT economists argue that capital controls can be employed alongside other policy measures (such as exchange rate management) to address balance of payments constraints and maintain financial stability. For example, Iceland’s implementation of capital controls after the 2008 financial crisis helped stabilize its financial system, protect its currency, and prevent a more severe economic collapse (Sigurgeirsdottir and Wade 2015). This demonstrates that capital controls can be a viable option in certain situations, particularly when a country faces significant financial and external challenges.
Finally, it is essential to understand that MMT acknowledges the potential constraints imposed by the balance of payments. However, MMT proponents argue that a government with a sovereign currency can still use fiscal policy to maintain domestic demand and employment, even in the face of external imbalances. Moreover, by implementing targeted fiscal measures, governments can stimulate economic growth, support job creation, and promote income equality, which can, in turn, help improve the country’s competitiveness and address trade imbalances.
It is essential to recognise that MMT is not a one-size-fits-all solution, and its proponents advocate for a flexible and context-specific approach to policy-making (Kelton 2020). By combining exchange rate management, capital controls where necessary, and fiscal policy, MMT aims to provide a comprehensive framework for addressing macroeconomic challenges while maintaining stability, full employment, and price stability.
Critiques like those of Prof. David Fields are invaluable in the ongoing debate surrounding MMT, as they highlight potential areas of improvement and encourage a more nuanced understanding of the interplay between fiscal policy, exchange rates, and capital flows. In addition, by engaging with these critiques, MMT economists can further develop and refine their theory, incorporating insights from other perspectives to create a more comprehensive and effective policy framework.
In conclusion, while MMT may not be a panacea for all economic challenges, its emphasis on exchange rate management, the potential use of capital controls, and fiscal policy offer a unique and valuable perspective on addressing balance of payments constraints. By considering the critiques of scholars like David Fields and adapting its policy recommendations accordingly, MMT can continue to evolve and contribute to a richer understanding of the global economic system and the tools available for addressing various economic challenges.
References
Fields, D. M. 2022, ‘The Deficit Myth, Modern Monetary Theory and the Birth of the People’s Economy’, Review of Political Economy, vol. 34, no. 2, pp. 391-392.
Kelton, S. 2020, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, PublicAffairs, New York.
Mitchell, W., Wray, L. R., and Watts, M. 2019, Macroeconomics, Red Globe Press, London.
Sigurgeirsdottir, S., and Wade, R. H. 2015, ‘From Control by Capital to Control of Capital: Iceland’s Boom and Bust, and the IMF’s Unorthodox Rescue Package’, Review of International Political Economy, vol. 22, no. 1, pp. 103-133.
Wray, L. R. 2015, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, 2nd ed., Palgrave Macmillan, New York.
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