I got involved in a Twitter debate after endorsing a post by @Frances_Coppola on monetary sovereignty. Nobody will care what I say in this thread, but I get along with both sides in this dispute, I want to remain so, despite eventual disagreements on some points. (1/n)
I regret the acrimonious turn of the debate. There are very valuable people on both sides of the debate. MMT has a very important role pushing the debate in favor of a more active and broad fiscal policy in many countries. And I support JG, among many of their proposals. (2/n)
Frances is a great analyst, in my view (and so @AnnPettifor, @JoMicheII, and many others). I teach at a master degree where we have Sraffians, Schumpeterians, LatAm Structuralists, Marxists, and Post Keynesian. I value pluralism, I think it is a plus. (3/n)
And I will always recommend what I believe to be the best explanation of the 2008 crisis I’ve read so far: coppolacomment.com/2014/10/financ… So, I really regret the ugly turn of the debate. This is a debate about theory, not about people. 4/n
Now, into the debate, which for me is a matter of focus and emphasis. Frances point stresses a couple of points, as I understand. First, monetary sovereignty is not a black or white issue. It has many shades of grey (sorry for the pun). 5/n
I know in recent years MMT has moved forward on this, with the sovereignty spectrum concept (I know of @NathanTankus and @stf18). I find it tightly linked to a literature I like a lot, the currency hierarchy literature. I prefer talking of hierarchies rather than spectrums 6/n
because it states clearly that all are not equal, and that some (a very few) command on the others. And it has implications. It is a lie to say (as many MMTer have said) that “if an exporter does not want to accept your currency in payment for your imports, too bad for him” 7/n
If Argentina pays for oil imports in pesos, we get bombed. If we pay royalties in pesos, we suffer. If developing countries pay food imports in their currency, they can’t buy. If you buy German machines with pesos, you can’t buy (and you need those, nobody else sell them). 8/n
The dollar is the main invoicing currency and the main settler of transactions, even between countries other than the US. And increasingly so in non-US dollar credit. This is a heavy institutional constrain, ask Iran and Russia. 9/n
So no, if an importer doesn’t have dollars, it’s not the exporter who suffers. It’s the importer, particularly if it’s a developing country. And this should also question the “imports are a benefit, exports are a real costs” narrative as well. 10/n
Yes, German machines are a benefit, if used in a development strategy. Nobody else produces them, perhaps Japan (and increasingly China). But what kind of cost is exporting a nuclear reactor (as Argentina does)? 11/n
There are many exports whose production has multiple benefits, and which do not have a domestic market. So, many things are exported just for obtaining currencies, but others are exported because it provides benefits. It's simply wrong to view them as a "cost"… 12/n
But as I said, many MMT have move forward on this. They admit the existence of a spectrum. They accept the idea that you do not have full, perhaps not even much, sovereignty, even in the context of no ER-pegging. OK. 13/n
But this brings us to Frances second major point, which relates to floating ER. The debate, again, seems to run in black & white options, to fix or to float. The IMF lists 10 different arrangements, and differentiates between de jure and the facto. 14/n
I state clearly that I dislike 100% explicit pegs, currency boards and, most of all, dollarization regimes. They’re awful. But I do want to push back against floating exchange regime, of the “ do not intervene” sort, because they’re really bad. 15/n
Floating ER regimes do not do what you think. They’re not shock absorbers; they do not stabilize anything, on the contrary. In today’s world (after BW), they’re destabilizing, because of the way they move (check @anninak82's work). 16/n
And they move this way because they’re dominated by financial flows. Everybody recognizes this. They are dominated by dynamics of sustained appreciations and sudden, steep depreciations, particularly the ERs of developing countries. And they’re damaging in both directions. 17/n
Floating ER is the theoretical epitome of laissez-faire. I’m borrowing this from Keynes. Friedman was a fan of freely floating ER regimes, for a reason. ER volatility is very very damaging. And that’s something I want to stress. Saying “do not intervene” is a bad advice. 18/n
That does NOT imply adopting a determined, explicit rule of intervention, pegging the ER nor anything of that sort. But interventions are one of the things needed to influence expectations, the main drivers of financial flows. 19/n
Besides, what do we mean by “intervene” or “not intervene”? One can intervene in the spot market (what usually comes to mind), but also in futures, forwards, and all sort of derivative markets. Markets on which you can also impose controls 20/n
Let me add one more thing: given the volatility of financial flows, a reserve accumulation policy is also recommended. You don’t need to fix the ER to intervene and buy reserves. But this is a digression 21/n
Almost every developing country intervenes. And with the swap agreements between major developed central banks, one has to question what “freely floating ERs” really are. A pure floating ER regime is a feature of the imagination. It does not exist. 22/n
Second, the ER regimes closest to a floating one, do not prevent balance of payments crises. Argentina is the latest example, but there are many others before 23/n
You may claim “Argentina borrowed in USD”. Yes, and we borrowed a lot. That was very bad. But we do not have any other source of USD. Some borrowing in USD is UNAVOIDABLE, precisely because of the currency hierarchy. Second, the hot-money and capital flight issue… 24/n
That could have been prevented, or diminished, with capital controls. MMTers are supportive of capital controls. But there are two corollaries to this. First, we’re no longer talking about freely floating ERs. 25/n
Second, it answers the “chicken or egg” issue. Capital controls are a theoretical and practical primary issue relative to the ER regime. That’s natural since we admit that floating ERs do not do what you usually think they do 26/n
And in this Hélène Rey’s work is right to the point, and @DanielaGabor also making the point. It’s not merely, nor primary, a matter of ER regime. It’s primarily a matter of capital controls (with all the caveats mentioned, for instance, here: onlinelibrary.wiley.com/doi/abs/10.111…) 27/n
These caveats are important. Just as I recommend capital controls, I do not kid myself about their omnipotence. They need constant updating, improving, and monitoring. The can’t prevent floods nor flights, but can help a lot 28/n
In spite of stressing the “you can be sovereign if you float” line, a lot of these issues are recognized by MMTers. I think much of this discussion regards emphasis and focus. Take this post by @billy_blog: bilbo.economicoutlook.net/blog/?p=37005 29/n
He claims “We argue that it is essentially false to assume that global financial flows can, ultimately, destroy a national currency.” That is a red flag, right there. Global financial flows, and institutions, are really scary, and rightly so. But... 30/n
But then he says that the main reason for the statement is that countries can impose successful capital controls. As I mentioned regarding the caveats, things are more complicated than this, increasingly so. There’s this issue of vulture funds, jurisdictions, etc, but OK. 31/n
He also says “As I have noted often in the past, there are countries that will always be vulnerable to exchange rate pressure.” 32/n
So, what to make of this? I’ll put my own summary, people can disagree, no need to insult eachother. First, it’s a matter of spectrum (or hierarchies). It’s not “you have it or you don’t”. It’s a matter of recognizing how much you have, and how can you get some more. 33/n
Second, capital controls (with caveats regarding design, implementation, monitoring, and updating) are paramount to any ER regime. Any. 34/n
Third, freely floating ER regimes are bad. But they do not exist in that pure conception. That does not imply, in the least, that fixed regimes are good. Nor that you have to adopt ER rules. But leaving ER for the markets to fix is a very bad idea. 35/n
I want to add one more thought, that has NOT been mentioned, and which will make me some enemies (hopefully not). And it's the idea of domestic monetary sovereignty in developing countries, the peso ruling above all, “you can’t default in your own currency”. 36/n
In the face of monetary spectrums, or as I prefer currency hierarchies, that phrase loses much of its relevance. Because you may well be able to pay your debt, to domestic or foreign creditors, but if your currency is convertible, you can ALWAYS face a capital flight 37/n
That’s the inherent threat of the currency hierarchy. Capital controls can help, as I said, but can’t stop floods nor flights (or they do so at very high costs). And that has implications for the domestic status of the domestic currency. 38/n
So a topic that needs further research is the INTERACTION between the international and the domestic currency hierarchy. They are not delinked at all. END
