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Continuing from our last discussion on the balance of payments, today we delve deeper into this topic. In this second part of our exploration, we'll focus on the role of institutional capacity and currency denomination in a country's fiscal and monetary sovereignty. We'll also examine how recent global economic developments, such as the COVID-19 pandemic, climate change, and digital currencies, have implications for MMT's approach to foreign transactions.
Political Aspects and International Relations Factors
A country's political system, dynamics, and values shape its capacity to pursue MMT policies in foreign transactions (Arestis & Sawyer 2003). Democracies may face scrutiny of unconventional policies, limiting governments' willingness to adopt MMT solutions (Kelton 2020). In contrast, concentrated power in authoritarian regimes means greater flexibility to implement MMT where it aligns with political interests (Freedom House 2022).
Global politics also significantly impacts countries' balance of payments approaches (Ocampo 2017). For instance, US opposition has amplified Venezuela and Iran's reliance on foreign reserves, and vulnerability to crises (Weisbrot & Sandoval 2007). Alternatively, China's investments provide financing for MMT experiments (Williamson 2021). A country's geopolitical ties determine whether MMT is constrained or facilitated globally (Tooze 2022).
Shifts in global governance, like rising developing country influence in the IMF and World Bank, could enable MMT-friendly reforms (Chin 2014). However, Western power may curb this progress (Lesage et al. 2013). Global politics' ebbs and flows will continue impacting MMT's possibilities and constraints.
This analysis aims to highlight how domestic and global politics shape a country's capacity for MMT principles in foreign transactions (Kelton 2020). The political system determines policy risk tolerance, while global alliances and power dynamics create opportunities for either cooperation or confrontation (Freedom House 2022). Politics generates both constraints and openings for MMT, which countries continually navigate.
Institutional Capacity and Currency Denomination
Strong institutional capacity, including efficient tax systems, stable financial systems with capital flow management tools, and capable bureaucracies, enables successful MMT-oriented policies in foreign transactions (Tymoigne & Wray 2013). Limited progress creates reliance on external financing from private creditors, foreign reserves, and multilateral institutions (Chandrasekhar & Ghosh 2002).
A nation's debts and assets currency denomination impact fiscal and monetary sovereignty (Bonizzi 2017). Foreign-denominated debts reduce flexibility, exposing countries to exchange rate risk, while domestic-currency bonds provide policy space (Eichengreen, Hausmann & Panizza 2003). Foreign reserves in other currencies also limit liquidity during crises remaining under issuing central bank control (Ocampo 2017). Realising flexible policies requires controlling the money supply, including issuing debts and holding assets in the sovereign currency (Wray 2015).
Building institutional capacity and emphasizing the domestic currency gradually strengthens fiscal and monetary sovereignty (Mosler 1997-98). Capital account regulations and alternative financing mechanisms can boost policy flexibility under institutional constraints (Grabel 2017). Pursuing MMT-consistent policies depends on governments' will and ability despite internal and external opposition (Tymoigne & Wray 2013). Growing interdependence gives countries greater incentive and ability to support each other in these efforts (Ocampo 2017).
A country’s institutional framework and currency denomination impact its fiscal and monetary sovereignty and ability to adopt flexible policies in foreign transactions successfully (Bonizzi 2017). Strong institutional capacity and control over domestic currency provide independence, while limited progress creates a reliance on external financing until capacity builds over time (Chandrasekhar & Ghosh 2002). Flexible policies also depend on international cooperation to overcome shared challenges (Ocampo 2017).
Recent Developments and Updates
In this section, we will discuss recent global economic developments and their implications for MMT's approach to foreign transactions, including the COVID-19 pandemic, climate change, digital currencies, trade relationships, income inequality, the Russo-Ukrainian War, and the economic challenges faced by Sri Lanka, the UK, and Turkey.
The Eurozone crisis: The crisis exposed the limitations of the EMU and highlighted the challenges faced by countries without sovereign control over currency issuance (De Grauwe 2013).
Brexit: The UK's decision to leave the EU emphasizes the importance of monetary sovereignty and the ability to control fiscal and monetary policies (Armstrong 2017).
US-China trade tensions: These tensions raise concerns about global trade imbalances and the potential for currency wars, highlighting the role of currency issuers and users in addressing these issues (Morrison 2019).
COVID-19 pandemic: The economic fallout from the pandemic led governments to implement massive fiscal stimulus packages, illustrating the ability of countries with monetary sovereignty to fund these measures (Baldwin & Weder di Mauro 2020).
Climate change and green policies: The growing awareness of climate change and the need for sustainable development have led to an increased focus on green policies, which can be financed through MMT principles (Michell 2021).
Digital currencies and CBDCs: The rise of digital currencies and CBDCs prompts questions about the nature of monetary sovereignty and the potential for new forms of international payment systems (Shirai 2019).
Income inequality and social unrest: MMT emphasizes the importance of government spending on public goods and services to address inequalities and promote social well-being (Seccareccia 2012).
Russo-Ukrainian War: Russia's invasion of Ukraine led to international condemnation, economic sanctions, and protests. MMT's approach can help understand the role of currency issuers amid these challenges (Tooze 2022). The conflict also sparked discussions on racism, media coverage disparities, and global attitudes towards the conflict (Sobolewska et al. 2022).
Sri Lanka's economic challenges: MMT's focus on sovereign currency issuance can provide insights into the limitations faced by countries like Sri Lanka that lack full monetary sovereignty (Jayasuriya 2022).
Turkey's economic situation: MMT's approach to foreign transactions can help explain the challenges faced by countries like Turkey, which are heavily reliant on foreign currency-denominated debt and lack full monetary sovereignty (Simsek 2022).
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Political Aspects and International Relations Factors
A country's political system, dynamics, and values shape its capacity to pursue MMT policies in foreign transactions (Arestis & Sawyer 2003). Democracies may face scrutiny of unconventional policies, limiting governments' willingness to adopt MMT solutions (Kelton 2020). In contrast, concentrated power in authoritarian regimes means greater flexibility to implement MMT where it aligns with political interests (Freedom House 2022).
Global politics also significantly impacts countries' balance of payments approaches (Ocampo 2017). For instance, US opposition has amplified Venezuela and Iran's reliance on foreign reserves, and vulnerability to crises (Weisbrot & Sandoval 2007). Alternatively, China's investments provide financing for MMT experiments (Williamson 2021). A country's geopolitical ties determine whether MMT is constrained or facilitated globally (Tooze 2022).
Shifts in global governance, like rising developing country influence in the IMF and World Bank, could enable MMT-friendly reforms (Chin 2014). However, Western power may curb this progress (Lesage et al. 2013). Global politics' ebbs and flows will continue impacting MMT's possibilities and constraints.
This analysis aims to highlight how domestic and global politics shape a country's capacity for MMT principles in foreign transactions (Kelton 2020). The political system determines policy risk tolerance, while global alliances and power dynamics create opportunities for either cooperation or confrontation (Freedom House 2022). Politics generates both constraints and openings for MMT, which countries continually navigate.
Institutional Capacity and Currency Denomination
Strong institutional capacity, including efficient tax systems, stable financial systems with capital flow management tools, and capable bureaucracies, enables successful MMT-oriented policies in foreign transactions (Tymoigne & Wray 2013). Limited progress creates reliance on external financing from private creditors, foreign reserves, and multilateral institutions (Chandrasekhar & Ghosh 2002).
A nation's debts and assets currency denomination impact fiscal and monetary sovereignty (Bonizzi 2017). Foreign-denominated debts reduce flexibility, exposing countries to exchange rate risk, while domestic-currency bonds provide policy space (Eichengreen, Hausmann & Panizza 2003). Foreign reserves in other currencies also limit liquidity during crises remaining under issuing central bank control (Ocampo 2017). Realising flexible policies requires controlling the money supply, including issuing debts and holding assets in the sovereign currency (Wray 2015).
Building institutional capacity and emphasizing the domestic currency gradually strengthens fiscal and monetary sovereignty (Mosler 1997-98). Capital account regulations and alternative financing mechanisms can boost policy flexibility under institutional constraints (Grabel 2017). Pursuing MMT-consistent policies depends on governments' will and ability despite internal and external opposition (Tymoigne & Wray 2013). Growing interdependence gives countries greater incentive and ability to support each other in these efforts (Ocampo 2017).
A country’s institutional framework and currency denomination impact its fiscal and monetary sovereignty and ability to adopt flexible policies in foreign transactions successfully (Bonizzi 2017). Strong institutional capacity and control over domestic currency provide independence, while limited progress creates a reliance on external financing until capacity builds over time (Chandrasekhar & Ghosh 2002). Flexible policies also depend on international cooperation to overcome shared challenges (Ocampo 2017).
Recent Developments and Updates
In this section, we will discuss recent global economic developments and their implications for MMT's approach to foreign transactions, including the COVID-19 pandemic, climate change, digital currencies, trade relationships, income inequality, the Russo-Ukrainian War, and the economic challenges faced by Sri Lanka, the UK, and Turkey.
The Eurozone crisis: The crisis exposed the limitations of the EMU and highlighted the challenges faced by countries without sovereign control over currency issuance (De Grauwe 2013).
Brexit: The UK's decision to leave the EU emphasizes the importance of monetary sovereignty and the ability to control fiscal and monetary policies (Armstrong 2017).
US-China trade tensions: These tensions raise concerns about global trade imbalances and the potential for currency wars, highlighting the role of currency issuers and users in addressing these issues (Morrison 2019).
COVID-19 pandemic: The economic fallout from the pandemic led governments to implement massive fiscal stimulus packages, illustrating the ability of countries with monetary sovereignty to fund these measures (Baldwin & Weder di Mauro 2020).
Climate change and green policies: The growing awareness of climate change and the need for sustainable development have led to an increased focus on green policies, which can be financed through MMT principles (Michell 2021).
Digital currencies and CBDCs: The rise of digital currencies and CBDCs prompts questions about the nature of monetary sovereignty and the potential for new forms of international payment systems (Shirai 2019).
Income inequality and social unrest: MMT emphasizes the importance of government spending on public goods and services to address inequalities and promote social well-being (Seccareccia 2012).
Russo-Ukrainian War: Russia's invasion of Ukraine led to international condemnation, economic sanctions, and protests. MMT's approach can help understand the role of currency issuers amid these challenges (Tooze 2022). The conflict also sparked discussions on racism, media coverage disparities, and global attitudes towards the conflict (Sobolewska et al. 2022).
Sri Lanka's economic challenges: MMT's focus on sovereign currency issuance can provide insights into the limitations faced by countries like Sri Lanka that lack full monetary sovereignty (Jayasuriya 2022).
Turkey's economic situation: MMT's approach to foreign transactions can help explain the challenges faced by countries like Turkey, which are heavily reliant on foreign currency-denominated debt and lack full monetary sovereignty (Simsek 2022).