The plan can’t mandate a change in the role of the Federal Reserve---that’s required to ‘implement’ MMT

Focusing on this point, Lavoie (2013), a self-described “friendly” critic of MMT argues that while MMT theorists are correct about some aspects of their theory, many other claims are based on an assumed institutional structure that in fact does not exist in most countries: a consolidated functioning (balance sheet) between the central bank and the Treasury, a consolidation that does not exist in most countries. Here is an important institutional constraint, pointed out by Lavoie, that shows the importance of institutional specificity and possibly undermines some of the key MMT claims. In the US, specifically, monetary financing of deficits does not happen automatically. The Federal Reserve has to choose to monetize the debt by doing open market operations, and this choice is as much a political one as an economic one. In practice, the Fed has done this occasionally, but rather sparingly.

Wray and other MMT theorists suggest this distinction between the Federal Reserve and the Treasury is just a “veil.” They claim that various processes of treasury payment and funds clearing, essentially mean that the Federal Reserve accommodates (effectively monetizes) the Treasury payments. Indeed, this view of Federal Reserve accommodation is a tenet of much post-Keynesian writing on “endogenous money” (see Pollin 1991 for a discussion, critique, and empirical evidence). While it is true that the Treasury and Federal Reserve engage in short-term interactions that tend to engender “debt monetization” in the very short term, the issue here, is the connection in the medium and long term. The debate about the budget deficit and monetary policy is not about short-term monetary accommodation: it is about what the central bank chooses to do about medium-term accommodation versus leaning against the wind. Does it try to keep interest rates low in the medium to long term to facilitate the financing of budget deficits, or does it lean against the wind and raise interest rates. The recent fighting between Donald Trump and the Fed shows that this is a real political issue. It is not obvious, without further political economy analysis, whether Trump or the Fed will win, if they in fact disagree.

To understand this complicated and important relationship requires having an analysis of the political economy of the Federal Reserve in particular and central banks in general (for an extensive discussion of these issues, see Epstein 2019).

In Epstein (2019), I analyze the sources of central bank political power. A key source in the US and many other countries is the political connections between bankers and the central bank. This relationship undergirds the so-called “independence” of central banks and is key in helping to determine the conditions under which central banks accommodate the Treasury or choose not to accommodate. It is no automatic process that can be explained by a flurry of T-accounts. A political economy analysis is required (see also Ferguson [1995]): political backlash from bankers and their allies is what has established and sustained “independent” central banks and austerity policy in the first place.6 Institutions and power do matter.