Weaknesses of MMT as a guide to development policy

Abstract

This paper addresses the limitations of Modern Money Theory (MMT) as a guide to development policy. We explore two main questions on this topic: whether policies championed by MMT advocates (i) ought to be implemented in low- and middle-income economies and (ii) can be implemented. In relation to the first question, we argue that the MMT literature mischaracterises the essence of the development challenge for low- and middle-income economies. Our argument is that the chief long-run growth challenge faced by developing countries concerns structural transformation rather than general aggregate demand insufficiency. We use several formal representations of the consumption–investment trade-off in growth theory, found in the Harrod–Domar growth model, the Feldman–Mahalanobis model and Kalecki’s 1963 growth model to illustrate this point. Concerning the second question, we argue that even if MMT had the correct diagnosis of the principal growth challenge faced by developing countries, its chief policy recommendations would likely be counter-productive if implemented outside of select advanced economies. We draw from the international economics literature on currency hierarchy and exchange rate volatility to illustrate this point.