Book Review: Modern Monetary Theory And European Macroeconomics

by: Brian Romanchuk

Dirk H. Ehnts, a lecturer in economics at Bard College, Berlin, has written Modern Monetary Theory and European Macroeconomics. The book acts an introduction to Modern Monetary Theory (MMT), aimed specifically at the situation in the euro area. This is distinctive, as a great deal of the MMT literature discusses the situation of floating currency sovereigns (which is the preferred position in MMT, as distinct from the rest of the post-Keynesian literature, where some economists are in favour of currency pegs). The later chapters of the book give a historical explanation of the euro crisis and offer an outline of how the euro area can be reformed. The book is aimed at non-specialist readers.

Book Description

Modern Monetary Theory and European Macroeconomics was published in late 2016 by Routledge. The hardback edition is 222 pages, and there is an ebook edition as well. (I read the Kindle edition, so I will not be quoting page numbers.)

The book is divided into four parts (excluding front/end matter).

  1. Part I - Theoretical Foundations (What is economic activity, anyway?)
  2. Part II - Money and Credit (Introduction to MMT-style balance sheet analysis.)
  3. Part III - Analysis (Theoretical model; the situation in the euro area.)
  4. Part IV - Reform

The ISBN is 978-1138654778.

The following sections will discuss these parts in turn.

Part I - Theoretical Foundations

This part has one chapter - "Substance and purposes of economic activity." It is a philosophical discussion of the purposes of economic activity. I generally stick to a narrowly defined part of economics (which I call "bond market economics"), and I will duck discussing this chapter.

Part II - Money and Credit

This part of the book returns to the relatively familiar terrain of MMT-style balance sheet analysis of the economy. It describes how debts become money, and the operations of the banking system, etc.

This tutorial covers chapters 2-6.

  • Chapter 2: Debts and balance sheets.
  • Chapter 3: The creation of bank deposits.
  • Chapter 4: The creation of central bank deposits.
  • Chapter 5: The instruments of a central bank.
  • Chapter 6: The creation of sovereign securities.

The material is divided into bite-sized sections, and Ehnts covers a lot of background material. For example, what is the TARGET2 system in the euro area? Even if the reader is familiar with the popular MMT literature, there are probably many topic areas that showed up in the euro crisis that are explained here.

This part of the book ends with two chapters on more advanced topics: financial system sustainability and inflation.

The chapter on financial stability discusses the MMT argument that the government acts as the "'deleverager' of the private sector." It also gives a background on bank regulation (reserves, capital requirements).

I will admit that I have SFC modelling on my brain right now; I am highly focused on the mathematical side of post-Keynesian economics. (Anyone who thinks post-Keynesians have an aversion to equations needs to meet my sfc_models package.) As a result, when reading the book, I tended to focus on the more advanced topics. The chapter on inflation and deflation was of obvious interest.

For a reader new to economics, the discussion is quite good. Ehnts offers a good summary:

While most people almost instinctively believe that an increase in the monetary supply - however that is defined - leads to inflation, the reality is more complicated.

The post-Keynesian discussion of inflation is complicated; Ehnts offers a reasonable summary for non-specialist readers. However, someone with a background in economics, but who is unfamiliar with post-Keynesian theories, would probably want more detail. For such readers, they would need to go to more advanced texts.

(However, if the reader of this review is unsatisfied with the "it's complicated" answer, I want to underline that the alternatives are worse. For example, the central bank can somehow move inflation expectations. How does it achieve this - orbital mind control lasers? Alternatively, inflation may be caused by deviations of the unemployment rate/real GDP from NAIRU/potential GDP. When those model predictions inevitably prove to be wrong, whoops, NAIRU/potential GDP moved!)

Part III: Analysis

Chapter 9 has the title "A macroeconomic model." The chapter discusses national accounting constraints on saving, including the accounting identity that often shows up in MMT discussion:

(S_p -I ) + (T - G) + (IM - EX) = 0

(This says that domestic private sector net saving (S_p - I), plus government sector net saving (T-G), plus external sector net saving (IM - EX) must sum up to zero: by definition.)

This chapter would likely be very interesting for readers who are not familiar with these concepts. At the same time, the more advanced critics of MMT are most likely going to complain about this chapter. The argument is that accounting identities are not enough to describe outcomes; we need to take into account behavioural patterns. Ehnt's description of these identities is based upon assumed behavioural patterns; I happen to agree with those assumptions. However, we would need a more advanced technical discussion to deal with some of the criticisms of this MMT-style analysis.

The rest of this part is a discussion of the situation in the eurozone. Ehnts outlines the economic history of the euro from an MMT perspective. His description is done at a relatively high level, as would be expected to, having to fit the history within two chapters. He does a fairly good job of skewering some of the myths associated with the origins of the crisis by looking at the data.

Part IV: Reform

Part IV consists of two chapters.

  • Chapter 12: How do we restore demand?
  • Chapter 13: The future: with or without the euro?

The first of these discusses the problem of demand deficiency. As is somewhat predictable, he argues that the government sector needs to step up demand in order to allow the private sector to undergo balance sheet repair.

For the euro area, the design of the euro itself is the main reason not to expect such an outcome. Ehnts discusses how the euro could be reformed, and possible scenarios for the euro area to be broken up (a peripheral country leaves; alternatively Germany leaves).

Once again, the discussion is at a high level. Unfortunately, the book does not offer a recipe for easily quitting the euro area.

Concluding Remarks

For non-specialist readers, the book offers a good introduction to Modern Monetary Theory, particularly as applied to the thorny problems of a currency peg system like the euro. However, the focus on being accessible to general readers means that this book may offer limited help for trained economists who want to get into the gritty details of how MMT differs from other approaches.