Modern Monetary Theory, the United Kingdom, and pound sterling

Among the many dire warnings from opponents of Modern Monetary Theory (MMT) is that MMT-inspired policies will cause the value of the domestic currency collapse. However, as is the case with other attacks on MMT, this argument is based on economic models that do not reflect the realities of the world in which we live. In particular, it combines a theory of inflation that assumes that economies tend to operate at full employment and that central banks can force economic agents to alter their portfolio of assets, along with an explanation of exchange rate determination that ignores roughly ninety per cent of currency transactions. This chapter will expose the weaknesses of the MMT-as-currency-killer argument and then substitute for it a model that is not only firmly grounded in the real world but shows that there is no reason to assume that MMT-inspired policies will cause a depreciation of the domestic currency.