by From L. Randall Wray MMT provides an analysis of fiscal and monetary policy that is applicable to national governments with sovereign currencies. We argue that there are four essential requirements that qualify a national currency as sovereign in the sense in which we use the term: the National government chooses a money of account in which the currency is denominated; the National government imposes obligations (taxes, fees, fines, tribute, tithes) denominated in the chosen money of account; the National government issues a currency denominated in the money of account, and accepts that currency in payment of the imposed obligations; and if the National government issues other obligations against itself, these are also denominated in the chosen money of account, and payable in the
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from L. Randall Wray
MMT provides an analysis of fiscal and monetary policy that is applicable to national governments with sovereign currencies. We argue that there are four essential requirements that qualify a national currency as sovereign in the sense in which we use the term:
- the National government chooses a money of account in which the currency is denominated;
- the National government imposes obligations (taxes, fees, fines, tribute, tithes) denominated in the chosen money of account;
- the National government issues a currency denominated in the money of account, and accepts that currency in payment of the imposed obligations; and
- if the National government issues other obligations against itself, these are also denominated in the chosen money of account, and payable in the national government’s own currency.
There is a fifth, important, consideration, which concerns the exchange rate regime and follows from the fourth requirement above. Strictly speaking, if a country adopts a gold standard or “dollarizes” it does not have what we define as a sovereign currency because it has agreed to exchange its currency for gold or dollars at a fixed exchange rate. Its obligation really is to deliver gold or dollars in payment. On the other hand, a nation with a floating exchange rate clearly does not commit government to deliver gold or foreign currency at a fixed exchange rate – so meets our definition of a sovereign currency. Many nations fall between these two extremes – they issue their own currency but operate with some degree of exchange rate management. They might also explicitly commit themselves to delivering foreign currency in payment of their own obligations (that is, they issue debt in foreign currency). While floating a currency is not necessarily required in order to operate monetary and fiscal policy in a manner consistent with a fully sovereign currency, issuing national government debt in a foreign currency, or promising to exchange domestic currency for foreign currency at a managed exchange rate (which amounts to much the same thing) will usually compromise domestic policy space.
MMT argues that the financial situation facing a National government with a sovereign currency (meeting the four conditions identified above) is entirely different from that faced by a household, a firm, or a government that does not issue a sovereign currency. The sovereign currency issuer:
- does not face a “budget constraint” (as conventionally defined);
- cannot “run out of money”;
- can always meet its obligations by paying in its own currency;
- can set the interest rate on any obligations it issues.
It is important to note the use of the word “can” in the final two points (as well as “does not” and “cannot” in the first two). A sovereign government can impose on itself a “budget” that does “constrain” its spending. This is normal practice and probably a good idea. A sovereign government could choose to default on its promises. This is exceedingly rare and probably always a bad idea. A sovereign government might allow financial markets to set at least some of the interest rates on government obligations. This is also common and perhaps a good idea – although as we’ll see below government sets the base rate even when it allows markets to set other rates.
It is important to note the use of the word “can” in the final two points (as well as “does not” and “cannot” in the first two). A sovereign government can impose on itself a “budget” that does “constrain” its spending. This is normal practice and probably a good idea. A sovereign government could choose to default on its promises. This is exceedingly rare and probably always a bad idea. A sovereign government might allow financial markets to set at least some of the interest rates on government obligations. This is also common and perhaps a good idea – although as we’ll see below government sets the base rate even when it allows markets to set other rates.
Note that MMT does not argue that because a government “cannot run out of money” it should “spend without limit”. MMT does not argue that because a government “can always meet its obligations” that “deficits don’t matter”. MMT does not argue that because a government does not “face a budget constraint” it should have an “unconstrained budget”. Yet these are the top three complaints our critics have about MMT. This is why MMT is labeled “dangerous” and linked to hyperinflation. But MMT has never said such things. read more – Alternative paths to modern money theory