Full Employment and Stability

A classic paper today. Mandatory MMT reading.

Warren Mosler’s 1997 is a little bit of MMT gold in a highly readable nugget of 17 pages. I recommend the journal article for the elegant typesetting, for educational fair use contact me and I can send you an electronic copy. For the free public version you can go to the UMKC website here: Full Employment and Price Stability .

Take-aways from Fixed vs Floating Exchange Rates

Mosler analyses two illustrative cases:

1. The Russian ruble under a fixed exchange rate policy.
2. The Hong Kong dollar under a currency board.

In both cases the artificial self-imposed constraints will tend to cause interest rate pressure from the money market, resulting in inflation risk if full employment is also adopted. In the two case studies full employment was not even achieved.

• A fixed exchange rate is a constraint on the government, an artificial constraint.
• This limits available policy space.
• Full employment could still be achieved, but at the risk of continual inflation, though not necessarily hyperinflation. Possibly not even increasing inflation, but obviously quite likely a high constant rate of inflation.
• For political (psychological and political constituency “tolerance”) reasons it is better to keep inflation moderate to low.
• With these goals, a floating exchange rate would be preferred.

A Nuance

It is not clear to me

You get it all backwards

A floating exchange rate economy is so vastly different to an economy constrained by a fixed exchange rate or currency peg, that it flips conventional orthodox economic thinking. One can say if the policy mentality carried over from a fixed exchange rate period of governance gets moved unchanged into a floating exchange rate regime, then this mainstream orthodox thinking will be in many senses completely backwards, and hence potentially very regressive.

Think:

The economy is an elite athlete and the economists want to put a plastic bag over her head and whip her to make her run faster.

Think 2

Under a fixed exchange rate or peg the elite athlete has her shoes tied together.
      On a floating exchange rate restriction of supply using an unemployed labour buffer is the plastic bag on the head of the economy, although the shoes have been freed up.

References

There is another copy of the article by Mosler that was a conference talk, I tidied it up and $\LaTeX$ rendered for it, you can get it here, Mosler 1998