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Potential challenges for Modern Monetary Theory in the periphery


This post outlines the challenges that Modern Monetary Theory proposals may encounter in the context of the periphery. It underscores the main characteristics of peripheral countries, highlighting capital formation and the materiality of technology within it as a key factor in economic development.



Throughout this paper, we will observe that Modern Monetary Theory (MMT) constitutes a framework that challenges the mainstream approach to monetary and fiscal policy. MMT posits that sovereign governments, which issue their own currency, possess substantial flexibility in funding public expenditures and fostering economic growth. In contrast to conventional perspectives, MMT argues that public spending is not constrained by tax revenue but rather by the real capacity of the economy to absorb such spending without causing inflation.  

According to MMT, economic growth can be stimulated by expanding aggregate demand through expansive fiscal policies. Since the state can issue its own currency, governments have the capacity to achieve full employment and fund public spending without necessarily relying on taxing or borrowing. However, it is important to note that inflation is a crucial consideration within the MMT framework. Monetary policy aims to boost the economy until it reaches full productive capacity. Beyond this point, inflation is likely to occur.  

The proposals put forth by MMT are undeniably compelling for policy formulation. However, they raise the question of their feasibility and potential effectiveness when implemented in peripheral countries for the purpose of promoting economic progress. This paper aims to contribute to the ongoing debate surrounding the applicability of the MMT approach in Latin American countries.  

While some research has explored MMT ideas in the context of the periphery (Fritz, 2017; Vernengo & Pérez, 2019; Aboobaker & Ugurlu, 2020), there is a noticeable dearth of studies specifically focused on Latin American countries, except for Edwards (2019) paper, wherein he argues that MMT-style policies have been implemented with unfavorable outcomes Edwards (2019) examined some historical Latin American countries cases where some MMT-related policies were implemented, however, although MMT approach advocates for fiscal-deficit policies, it is only a part of the MMT argument and in Latin America such an approach has not been implemented in strict. On the other hand, the success of MMT policies would depend on several factors, such as the political stability, and Edwards’ (2019) oversaw the fact that both Chile and Venezuela where under foreign pressure that brought about political turmoil and at least affected the economic outcome of their governments measures.  

A critical examination from the structuralist standpoint is noticeably absent. This post seeks to address this gap and provide such a critical analysis. To do so, an exposition of the MMT approach will be presented through the perspectives of prominent proponents, including Warren Mosler, Randall Wray, William Mitchell, and Stephanie Kelton, who have contributed significantly to MMT insights. Given the importance of the external sector for the peripheral economies, international trade will be examined from a theoretical perspective in the light of structuralism, keeping in mind the importance of the rate of profit in economic development from a Marxist perspective. It will allow us to analyze the empirical evidence of Latin American countries as a case study to illustrate the potential limitations of the MMT policy proposed in the periphery.

The paper is organized as follows: In the second section, the MMT approach is presented, highlighting key points. The third section discusses the challenges of implementing the MMT approach in peripheral economies. Section four presents empirical data from Latin America. 


  1. The MMT approach overview 

The MMT points out that under a gold standard, money is considered to be an economic resource, and the state has to tax or borrow revenue to fund its spending. However, under a fiat-money system, such reasoning is not applicable since the government is both the issuer and user of money. Therefore, there is no budget constraint as in a gold standard or any commodity money system (Mosler, 2018).   

According to Wray (2012), we have been residing within a state money system for the preceding 4,000 years. Within this framework, states possess the authority to designate the unit of currency for accounting purposes and to establish commitments denominated in said currency, including taxes, tribute, tithes, fines, and fees. To fulfill these obligations, the state issues a currency that is accepted as a mean of payment. Contemporary governments are equipped with central banks that facilitate the creation and receipt of payments on their behalf. It is the government’s prerogative to direct the central bank to credit or debit accounts held by private banks.  

In the context of the MMT framework, the state sets the supply and demand of its own fiat currency. The issuance of money comes out of thin air, as the government generates currency (comprising central bank reserves and physical currency) via expenditures, while private banks generate deposits (notes) through loan activities. It is important to acknowledge that while both the governmental and private banking sector engage in money creation within a fiat currency system, a «money pyramid» exists. This pyramid positions the government’s own currency at its pinnacle, beneath which resides private bank money and various other forms of currency that may be present. On the other hand, a sovereign government stimulates the demand for its own currency by imposing taxes and other obligations (e.g., fines) within its jurisdiction, exclusively payable in said currency. The demand for government money is rooted in an administrative framework, whereas private bank money is contingent upon market dynamics, given that private banks generate deposits through loans (Wray, 2012).   

Building upon the aforementioned perspective, it can be posited that the MMT recognizes the dual nature of money as both endogenous and exogenous. This acknowledgment arises from the fact that both the state and private banks generate money. The state’s money creation occurs within a top-down administrative framework, while private banks contribute to money creation through responding to public demand.  

As the state currency is imposed from the top, taxes are mere instruments of the State to create demand for the currency, rather than a necessity for private funding of the public sector. According to Wray (2012), contrary to a household’s budget, a government that issues its own currency and possesses the authority to compel economic agents within a territory to pay taxes in said currency, “does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid«. Consequently, «a sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.» (p.2).  

If the public sector provides means of exchange to the currency-users (including taxpayers) and reserves to private banks (required to buy public bonds), neither taxes nor public debt are a necessity but a policy choice (Wray, 2012).  The possibilities of an economy to expand is set by the amount of material means such an economy counts on. The issue does not lie in how an economy will pay to afford goods and services supplies, but how an economy will “resource it”. Thus, “MMT places inflation at the center of the debate over spending limits” (Kelton, 2020, p.234-235). From the MMT perspective, the money creation out of thin air is not a problem, but the quantities and the way it is used; thus, deregulation of the private banking system may bring about bubbles and misallocation of resources, and it is a hurdle mostly if it is supplied beyond the point of full employment of the economy’s factors of production (Wray, 2012).   

If resources are the limit to the monetary policy, investment is the key variable that expands such resources and make space for the money expansion aimed to get full employment. Resources must be allocated in capital-building activities in order to get higher volumes of output in the future. Contrary to the orthodoxy, the MMT asserts that investment does not come from savings but the other way around. Savings are seen as a real variable that stems from investment; since manpower is paid to turn out capital goods that wage labor cannot purchase and consume, which means that there is an abstention of present consumption that left new capacity to produce consumer goods in the future1. Therefore, a reduction in individual spending will not boost investment (Mosler, 2018), on the contrary, it would make room for “the paradox of thrift”, where individual savings provoke insufficient demand that discourages investment (Krugman, 2016, p.30) as unsold inventories pile up. In Mosler’s (2018) words:  

Savings equals investment, but the act of investment must occur to have real savings… The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money. (p.11)  

Higher savings means lower consumption and discouragement of investment, which in turn, means lower income and lower savings as “one person’s savings can become another’s pay cut. Savings equals investment. If investment doesn’t change, one person’s savings will necessarily be matched by another’s’ dissavings” (Mosler, p.11). In the same guise, a public budget surplus does not raise savings but squeezes the wealth of the non-government sector and shrinks savings (Mitchell, 2011). 

The identity savings equal investment (S=I) as it is exposed by the MMT makes room for the public sector as a booster of economic activity since the government can allocate manpower and capital in capital-building activities. Nevertheless, it does not mean an administrative top-down model of resource allocation, the MMT acknowledges the importance of the private sector as a source of money creation and as a booster of private initiative. However, Wray (2012) considers that there is little government-creation to serve the public interest and too much private money creation by the for-profit financial sector going to financial markets. It can be interpreted as the creation of too many means of exchange rather than use-value goods and services. In this regard, it is illustrative the Bill Mitchell’s explanation of the Chinese economic success; according to Mitchell (2011), China, as a developing country (capital-scarce economy), is the outcome of a strong domestic growth, rather than an export-led model, boosted by the public spending stimulus that provides income growth, and in turn, rising savings to the private sector. In this view, the public sector can create savings as it can encourage private investment –or even, why not? raise directly the public investment.   

In the MMT approach the public spending is seen as a foster of economic activity as it provides funds to the private sector, hence, a balanced government budget means that the currency has returned to the public sector without any net contribution to the financial wealth of the private one. To illustrate this point, in Rallo (2017, p.103) an explanation about the MMT reasoning can be examined using the macroeconomic identity of an economy without foreign trade. The purpose here is not to criticize the MMT approach as Rallo (1917) does, but to expose its main features:   


GDP=C+I+G      [1] 


Where each compoent of the equation stands for the following variables: gross domestic product (GDP) equals consumption (C), investment (I), public spending (G). Knowing that investment equals savings and taxes are the counterpart of the public spending, we get the following cleared equation: 


GDP=C+S+T       [2] 

C+I+G=C+S+T    [3] 

S-I=G-T                [4] 


As the equation shows, the net private savings equals the public budget. However, if we allow the equation for foreign trade as it is found in Medina (2017, p.96), the reasoning can give us some key points for the case of the peripheral economies. 



GDP≡C+I+G+X-M                            [5] 

GNP ≡GDP+ Pi ≡C+I+G+X–M+ Pi     [6] 

(GNP -C-T-I) + (T-G) + (M-X-Pi) ≡0    [7] 


In the given context, GNP stands for Gross National Product, then, (GNP -C-T-I) represents private sector savings, (T-G) denotes the public balance, and (M-X- Pi) signifies the external balance, given Pi to denote the primary income account2. A trade surplus indicates that the economy is extending loans to its trade partners, as its exports surpass imports from the global market (M<X+ Pi). Conversely, if this economy imports more than it exports, it accrues debt with its trade partners (M>X+ Pi). Notably, the equation demonstrates that the sum of all balances equals zero; whenever one sector aims to save, at least one of the other sectors must incur debt or dissave. There are four possible outcomes that ensure equilibrium across all balances: a) when both the private and public sectors are saving, the rest of the world must accumulate debt by importing more from the economy than it exports; b) if the public sector and the rest of the world prioritize saving, the private sector must incur debt; c) if the private sector and the rest of the world are saving, the public sector must accrue debt; d) all sectors are balanced, maintaining incomes equal to spending1.    

If we rearrange equation 7, the current account (external balance) equals the net private savings.  


(M-X- Pi) ≡ – GNP +C+I+G   [8] 

X-M+ Pi = GNP -C-I-G         [9] 

X-M+ Pi   = S-I                     [10] 


The equation evidence that the excess of investment over domestic savings (S<I) entails a negative current account that is funded by external debt; higher external unbalance means higher levels of external debt.   

The equation illustrated earlier, allow us to see the importance of economic trade as it has to do with the balance of payments and the foreign debt, given that while sovereign currency allows policy space, the issue of debt in foreign currencies reduces such a space (Tymoigne and Wray, 2013). This is key to understand the economic condition of the periphery as technological-dependent countries and therefore as foreign currency users.  



  1. Some challenges of the MMT approach in peripheral economies

3.1 Capital as an embodied technology 

It is well-known that historically, manufacturing has played a pivotal role in economic development (Kaldor, 1977; Chang, 2017). Prebisch (2012) pointed out the necessity for Latin America to industrialize through manufacturing to achieve economic development, since the primary products deliver low income-elasticity of demand (Hengel’s law). On the other hand, Nurkse (1953) argued that capital formation is a key part of the development process and that the underdeveloped conditions of the periphery pose a hurdle to induce investment, as the size of the market is too small in real terms to promote savings and productivity growth. As Nurkse (1953) stated, “If it were merely a deficiency of monetary demand, it could easily be remedied through monetary expansion; but the trouble lies deeper.” (p. 104). Peripheral economies rely on importing manufactured capital goods to produce consumer goods because they do not yet have the necessary economic conditions in place to establish their own capital goods industry, as explained by Akamatsu (1962). In line with the theoretical work of Murphy et al.(1989), the peripheral countries remain in a non-industrialized equilibrium and they would require a “big push” from the State to move to an industrialized equilibrium. However, the question that arises is to what degree the State’s intervention is constrained.  

Although investment creates savings, as explained by the MMT approach, peripheral economies encounter hurdles due to their underdeveloped conditions and lack of technology. This technology, essential for efficient production, is often embodied in imported physical capital and technical knowledge. Since this knowledge is linked to the learning-by-doing process inherent in production (Nurkse, 1953), peripheral economies require imports of capital goods, along with technical assistance, to function effectively within a modern economy and avoid the high costs associated with autarky.  

Moreover, technology’s inseparability from its material body is a principle underscored by Fagerberg (1994). This principle extends to the intangible assets of modern economies, as emphasized by Jones (2017) in an illustrative article where asserts that “we still live in a material world, and these intangible investments, important as they are, are still largely realized in physical objects”. This challenge is particularly pronounced in peripheral economies, where the lack of knowledge and technology for efficient production forces a dependence on imported capital goods that encapsulate the technology, they are unable to generate domestically (Merhav, 1969). De Long and Summers (1991, 1992) further emphasize the critical role of investment in machinery and equipment for economic growth through their empirical study. As a result, they assert that policymakers must prioritize the inclusion of capital goods imports as a crucial factor in their strategic decision-making.  

The most successful economic development strategies relied on manufacturing sector as a vehicle to boost capital formation and labor productivity, besides technological progress. The East Asian economies’ performance is an evidence of this. Capital goods production through own manufacturing seems to be a trend of development as it can be seen in the table 1.  The data for gross fixed capital formation is used as a proxy for the level of investment in capital goods and manufactured intermediate goods. This is because the two measures are closely correlated, and they both provide information about the amount of investment in the economy.  

It is noteworthy to mention that here we are not asserting that the only possible way to achieve economic development is through the manufacturing expansion. Nevertheless, it has been a feature of the major success experiences (Chang, 2007). 

As you can see, there is a clear trend of increasing investment goods production as a percentage of GDP in countries with higher income levels. Lower-middle-income countries have also seen sustained high levels of investment goods production in recent decades. However, their levels are still lower than those of the high-income countries.   

Table 1. Fixed gross capital formation as a percentage of GDP by income level  


Income Level  1950  1960  1970  1980  1990  2000  2010  2022 
High-income   18.9  21.7  25.2  27.5  28  28.2  27.4  27.4 
Upper-middle-income   12.9  14.4  17.1  18.8  19.8  20.1  19.3  18.9 
Lower-middle-income   10.8  12.2  14.8  16.7  17.7  18.1  17.6  17.3 
Low-income   7.6  8.7  10.3  11.3  11.8  12  11.8  11.7 


A question arises, can a country develop without advancing its own manufacturing base? In principle, an economy could rely on the other sectors (e.g. agriculture and/or services) and imports manufactured capital and consumer goods, however, a development strategy that dismisses manufacturing as a central pillar of economic growth would encounter some difficulties. Firstly, imports necessitate exports to secure foreign currency reserves. Secondly, the service sector lacks the same level of tradability as manufacturing. Lastly, while the resource-based primary sector is tradable, it relies –as well as services –on manufactured capital goods for sustained operations. These observations provide insight into the success of East Asian countries, as they focused their development on manufacturing and utilized it as a source of foreign exchange. In sum, manufacturing matters; it is not only the source of capital goods and key intermediate goods but also of hard currency (Chang, 2007).  Can the MMT be a framework to find the way out of underdeveloped capacity to produce manufactures? 

Based on the above-mentioned, a peripheral economy will demand foreign exchange to develop its productive forces, since it cannot produce the capital goods required to turn out goods and services in modern conditions (keeping minimum productivity global standards).  Therefore, loans denominated in foreign currency happen to be a requirement rather than an option for a developing country to get technology and develop. The need for hard currency can be easily evidenced if we clear investment in equation 5 to get the following equation:  


  I = Y – (C+G+X) + M     [11] 



Taking equations 10 and 11 into consideration, it becomes evident that investment grows as long as imports and domestic savings increase. From equation 10, we derive the following definition of investment. 

I=S-X+M- Pi                  [12] 

Demand for investment requires imports of every type of capital and intermediate goods that allow the expansion of the productive capacity, and as already mentioned, in a peripheral economy the demand for capital equipment faces discouragement by the smallness of the market size (Nurkse, 1953). If the MMT approach may solve the problem of demand, it is problematic that it can solve the supply of investment goods -and technology -that cannot be produced internally. In other words, the periphery is resource-constraint since it requires hard currency that they cannot issue at will to import embodied technology. 

Although it is true that in the domestic sphere there is a «money pyramid» as Wray (2012) argues, also there is an international currency hierarchy where the dollar, euro and yen are at the top of the global pyramid and the peripheral economies are forced to borrow in foreign currency (the original sin). This backward condition is well-explained by XXX. The peripheral countries are before a condition where they issue a weak currency and are forced to borrow in a hard foreign currency while keeping the exchange rate in check to avoid the exchange rate pass-through effects ( ).  


3.2 The exports side hurdle 

Difficulties also stem from the export side; the periphery encompasses one-product exporting countries, so that their import capacity is limited by the export of a commodity that depends on the international price. Since in the long run the capacity to import is set by exports (Thirwall, 1979, 2011), the peripheral countries’ performance is subjected to fluctuations.    

If the exports have a high degree of concentration in one product, the revenue that comes from the exported output is the outcome of the quantities exported Q times the international price P*. An example of this condition is Venezuela, where its main export is oil. 


X = P* × Q                      [14] 


The above-mentioned makes the case for a need of productive diversification that reduces the dependency on a unique commodity to export. It is stated by the structuralism approach that the expansion of the investment and the economy requires structural changes in the productive apparatus (Ocampo, 2014).  Once again, manufacturing gains much more significance.  

Utilizing the aforementioned equations in conjunction with the developmental trajectory of East Asian economies, we can discern fundamental elements for analyzing the challenges that beset Latin American economies in their pursuit of development. During the 1950s, East Asian nations shared a similar level of development to that of Latin America (Maddison, 2010). However, East Asia adeptly sustained a robust and persistent pattern of external savings by fostering a vibrant external sector (M<X+Rx), along with substantial private savings (PNB-C-T-I), characterized by a propensity for restrained consumption (C) in favor of directing resources towards substantial investments (I). In this context, such an economy is well-placed to effectively manage significant public deficits, aligning with the magnitude of its external and private savings. In other words, public deficits cannot entail an economic problem per se if there is a thriving external and internal sector that create savings. As it is stated by Park & Estrada (2009), the Asian countries deliver a huge amount of reserve accumulation, even beyond their necessity. Can the MMT be a good framework to solve the problem of lack of foreign exchange and technical dependence of the periphery?  

Latin America’s reality differs from that of the East Asian countries, this held large external deficits and low private savings, brought by imports larger than exports and high consumption and low investment over long periods. In other words, Latin America is getting debt as the rest of the world is saving and funding its deficits.  

The MMT stresses the idea of the supremacy of exogenous money creation over endogenous money creation, as the state is the one that can lead the economy to full employment (through a job guarantee policy) rather than the market-banking mechanism. However, it seems that the MMT approach does not respond to the fact that in a market economy, the private sector (including banking) delivers efficiency in resource allocation, as it consists of profit-seeking enterprises3. Moreover, the MMT does not address the rate of profit problem capitalism seems to face, as suggested by the data of the last few decades.

Low capital formation is one of the main problems backward economies must cope with, and it is what holds such economies in an underdeveloped equilibrium (Nurkse, 1953). If the United States is used as a benchmark of level of development, capital formation of Latin America is indeed a significant challenge for the region. The figure 1 highlights the amount of capital per worker in selected Latin American countries compared to the United States, indicating a considerable gap in capital stock. These economies continue holding the main characteristic of the periphery as it is underequipped with capital (Nurkse, 1953) in comparison with the advanced industrialized center.  Except for Chile, Uruguay, and Peru, the trend shows a decline in capital stock per worker. This declining trend signifies a worrisome situation, as it suggests a lack of investment in productive assets, and technology. Insufficient capital per worker can hinder productivity growth and limit economic development.

Figure 1. The capital stock of selected Latin American countries compared to that of the United States  

 Source: The WPT 10.0
 Source: The WPT 10.0



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Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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