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Modern Money Theory and exchange rates

In: The Elgar Companion to Modern Money Theory

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  • John Harvey

Abstract

When Modern Money Theory (MMT) and exchange rates are mentioned in the same breath, it is generally for one of two reasons: to argue that a fixed exchange rate regime unnecessarily restricts policy space or to suggest that MMT will cause domestic currency values to collapse. While there is something to be said for the former, the latter is based on a flawed understanding of exchange rate determination. Whether the adherents realize it or not, the MMT-as-currency-killer view is derivative of the Monetary Approach to the Balance of Payments, a mainstream explanation that combines a poorly-constructed model of the domestic macroeconomy with a theory of currency prices that ignores ninety percent of the market. The goal of this chapter is to outline the weaknesses of this argument and thereby arm those who may be confronted by it.

Suggested Citation

  • John Harvey, 2024. "Modern Money Theory and exchange rates," Chapters, in: Yeva Nersisyan & L. R. Wray (ed.), The Elgar Companion to Modern Money Theory, chapter 22, pages 293-302, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:18498_22
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    File URL: https://www.elgaronline.com/doi/10.4337/9781788972246.00031
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