Modern Monetary Theory: Cautionary Tales from Latin America

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According to Modern Monetary Theory (MMT), it is possible to use expansive monetary policy — money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits that will ensure full employment and good jobs for everyone, through a “jobs guarantee” program. In this article, I analyze some of Latin America’s historical episodes with MMT-type policies (Chile, Peru, and Venezuela). The analysis uses the framework developed by Dornbusch and Edwards (1990) for studying macroeconomic populism. The three episodes studied in this article ended up badly, with runaway inflation, huge currency devaluations, and precipitous real wage declines. These experiences offer a cautionary tale for MMT enthusiasts.

Sebastian Edwards