MMT and policy assignment in an open economy context : simplicity is useful, oversimpliflflication not so much

Modern Monetary Theory (MMT) has recently received significant at- tention in academic and policy circles. Critics question the sustainability of MMT-prescribed approaches to fiscal and monetary policy, especially over extended periods of time, in the presence of international financial markets, and for developing country governments that borrow in foreign currency. I formalize some of these arguments using a dynamic, open economy, Tobin-Markowitz portfolio balance environment that takes into account: (1) the role of expectations in the foreign exchange market and the feedback mechanisms between these and the exchange rate and in a- tion, and (2) interactions between the current account, debt accumulation, and the goods market. I show that continuous monetary accommodation of fiscal policy by a consolidated authority that targets low interest rates is likely to generate instability and make it hard to maintain full employ- ment with stable in ation. Importantly, this is true even in the absence of rational forward-looking expectations or sovereign foreign indebtedness.