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Modern Monetary Realism

Kenneth Rogoff's criticism of Modern Monetary Theory assumes that MMT advocates don't care about budget deficits or the independence of the US Federal Reserve. But these assumptions are wide of the mark, and Rogoff himself sometimes undermines his own arguments.

AUSTIN – Is Modern Monetary Theory (MMT) a potential boon to economic policymakers, or, as Harvard’s Kenneth Rogoff recently argued, a threat to “the entire global financial system” and the front line of the “next battle for central-bank independence”? For Rogoff, the threat seems to stem partly from the fear that MMT adherents may come to power in the United States in the 2020 elections. But he also makes several substantive arguments, common to many critics of the MMT movement. 

First, there is the claim that, as Rogoff puts it, MMT is all about “using the [US Federal Reserve’s] balance sheet as a cash cow to fund expansive new social programs.” Second, Rogoff and other MMT opponents strongly reject the idea that, quoting Fed Chair Jerome Powell, “deficits don’t matter for countries that can borrow in their own currency.”

Yet, as Rogoff admits, “the Fed itself is responsible for … confusion surrounding the use of its balance sheet.” Indeed, while Rogoff decries the Fed’s “quantitative easing” – involving the purchase of trillions of dollars in public (and private) debt after the financial crisis – his argument is that QE didn’t really work, not that it was destabilizing or inflationary. He sees no threat to the global financial system in that experiment.

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