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Krugman delights modern monetarists

The slightly kooky proponents of modern monetary theory are taking cheer from Paul Krugman’s post on the impotence of bond vigilantes.

Krugman has made this important observation in the past, but this time he spells out his reasoning, step by step, and the key points align closely with that of modern monetary theory (MMT).

Of course, Krugman is still far too mainstream for the MMT gang. The model he uses to demonstrate the power of sovereign currency issuers is not one they subscribe to, but he comes to the “right” conclusions so most is forgiven.

All this is both interesting and heartening. Clearly, Krugman has based his argument on the following observable facts:

1. The U.S. government is a currency issuer, not currency user.

2. The U.S. government allows the exchange rate to float.

3. The rate of interest under a flexible exchange-rate sovereign currency regime is set as a matter of policy rather than being market determined.

4. The U.S. government does not have large debt denominated in foreign currency.

Regardless of how he gets there, some in the MMT community see Krugman as popularising one of their most important insights. Will other mainstream economists agree with him?

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