Randy Wray — MMT AND THE EURO: Are Current Account Imbalances to Blame for the Euro Disaster? Part 1

Two weeks ago I cited Paul McCulley’s claim that MMT got it right. I followed that up last week with Brad DeLong’s claim that we’re all Minskians now. Well, most of us, anyway. Is MMT on a roll? Well, maybe not, if you listen to the critics.
In particular, an Italian economist, Sergio Cesaratto called the MMT victory “spurious”. 

(http://nakedkeynesianism.blogspot.com/2012/07/spurious-victory-of-mmt.html) I’ll try to focus in on the main complaint, which seems to be that MMT missed the true cause of the Euro mess: current account deficits run up by some profligate EMU members. 

Over at NEP, I have just offered up a number of early examples of MMT analyses that in my view “got it right”: http://neweconomicperspectives.org/2012/07/mmt-the-euro-and-the-greatest-prediction-of-the-last-20-years.html. I won’t repeat all of them here as I am going to focus directly on what I see to be the causes of the crisis and link that back to the argument that it is all due to current account imbalances.

Sorry, this is going to be a long and wonky piece, as befits a complex and still unfolding disaster. And it will come in two parts.

Read it at Economonitor | Great Leap Forward
MMT AND THE EURO: Are Current Account Imbalances to Blame for the Euro Disaster? Part 1
by L. Randall Wray

Ramanan comments on operation reality in fx

One will always find government debt in foreign currency for a nation having external issues. After the Bretton Wood system broke down and nations freely floating their currencies, they realized it is actually difficult to just float and let the fx markets find the clearing price. Hence there is official intervention in the currency markets, issuance of debt in foreign currency, holding of foreign reserves etc. Most people look at official intervention as the central bank preventing the price from falling too much but it’s more than that. It clears markets and prevents a prophecy to build up. For example if the currency falls, it may lead to expectations building leading to further outflows. So I saw STF in the mikenormaneconomics thread saying that the government didn’t behave in an MMT prescribed way and such – but it is impossible for the Treasury of most nations to behave that way. It’s “operational reality”.

Ramanan in a comment at Modern Monetary Realism

According to MMT, there are two constraints on a currency sovereign, inflation rate and fx rate. There continues to be disagreement over the conception of the fx rate, in that the MMT position is generally understood to be that in a non-convertible flexible rate monetary system, floating rates are self-correcting so that markets will always clear for a currency the issuer of which does not take on foreign debt or fix its fx rate. While some qualifications are added, opponents do not believe they are sufficient and a more detailed analysis is necessary.

Ramanan and others dispute the MMT stance, holding that it needs to be carefully qualified with respect to the general case and specific instances, with the US being a special case that cannot be extended to many other countries, and that even the US cannot presume to enjoy its "special privilege" forever without capital flight and therefore exogenous pressure to raise interest rates to attract capital and curtail demand in order to decrease imports.

I hope I summarized both positions correctly. Please correct me if I did not.

Ramanan — The Monetary Economics Of Sovereign Government Rating

In this post, I will attempt to describe the dynamics of defaults and restructurings by going through some monetary economics of open economies.

Read it at The Case of Concerted Action
The Monetary Economics Of Sovereign Government Rating
by Ramanan

Ramanan does publish comments at his place, and this is really a seminal post, so have it here.