The article criticizes modern money theory (MMT), which is a macroeconomic policy that aims to achieve full employment by using money-financed fiscal deficits, without using any formal modelling. The article claims that MMT policy would not work in an open and internationally highly financially integrated economy, because it would either cause the money stock to grow unsustainably large or require domestic interest rates to be set at levels that would contradict the goal of full employment and create economic and financial instability. The article argues that MMT can only work, at best and if at all, in specific country circumstances, such as having high policy credibility or issuing an international reserve currency, which can prevent the negative effects of MMT policy and make expansionary demand shocks effective.

In a world of highly financially integrated economies, economic theory should differentiate between the role of local agents and that of global financial investors and place the latter at the centre of macroeconomic modelling. The portfolio choices of global financial investors influence the effectiveness of macroeconomic policies: the greater the credibility of a national economy (as perceived by global financial investors), the larger its space available for running effective expansionary policies. Conversely, when investors consider an economy not to be credible, they act in ways that narrow its policy space, and the effects of expansionary policies dissipate into currency depreciation and higher inflation, with little or no impact on real output. Economies should keep their public debt low, limit it to financing investments that repay themselves and/or to bringing the economy out of recessions. In this second case, they should commit to reducing the debt during recoveries.

In this article, I argue that current macroeconomic models do not recognise the role that "global investors" play in determining the space for effective macroeconomic policies. These important players must be placed at the center of macroeconomic analysis if we are to understand how macroeconomic policies work in the global financial environment. The article describes the key characteristics of global investors, analyses their power to determine the value at which public sector liabilities (money and debt) are traded on international markets and how this power affects policy effectiveness. No country is truly sovereign in a globalised world and all governments are subject to an inter-temporal budget constraint that is endogenous to global investor decisions. The policy choices of countries in today's globalised financial environment would benefit from revisiting some of J. M, Keynes's teachings, considering his in-depth knowledge of global financial markets and how they affect economies of the countries.

The Portfolio Theory of Inflation (PTI) brings global finance into macroeconomic policy analysis, and addresses Obstfeld and Taylor’s (2017) remark that standard models of macroeconomic stabilization do not pay sufficient attention to finance. In particular, the PTI approach shows that: (1) in an open and globally financially integrated national economy the effectiveness of macroeconomic policies depends on the level of credibility that financial markets attribute to the economy, in particular its policy authorities and policy stance (2) whereas the monetary policy trilemma constrains countries to enjoy at most only two of the three possible states (i.e. exchange-rate stability, freedom of cross-border payments, and economic policy autonomy), the trilemma does not constrain all countries equally if they operate in a context of high international financial integration: credible countries enjoy greater space for effective policies than less credible countries (3) not all countries benefit equally from a floating exchange rate regime, either; the latter offers credible countries greater space for policy effectiveness and protection against external shocks, while such space gets progressively thinner as country credibility weakens (4) an open economy that is fully financially integrated, internationally, with large public debt and poor policy credibility does not stand to gain much in terms of shock insulation and policy autonomy from either issuing liabilities in its own (rather than a foreign) currency or adopting a flexible (rather than a fixed) exchange rate regime (5) however, all else being equal, the benefits from a floating exchange rate regime increase with the degree of the economy’s policy credibility.

The Portfolio Theory of Inflation (PTI) incorporates a global perspective on the analysis of macro policy effectiveness. According to the PTI, in open and internationally highly financially integrated economies: The intertemporal budget constraint (IBC) of governments is endogenous to global investment choices: it is more flexible for credible countries and tighter for less credible ones, and the IBC of highly credible countries becomes even more flexible at times of global crisis. Macro-policies are effective in credible economies and less effective (and potentially inflationary) in non-credible economies (with flatter Phillips curves being observed in credible countries and becoming even flatter in times of global crisis). Governments can reap no advantage from redenominating their debt or increasing the share of their debt held by residents and monetary financing of public deficits is effective as an anti-recessionary, short-term stopgap, but it is not sustainable as a policy to sustain full employment in the longer run.

The effectiveness of exchange rates as an adjustment mechanism in a given country depends on the role played by domestic financial markets. With floating exchange rates and full integration into global financial markets, policy-making space is determined by the size of public debt and the degree of policy credibility. A large debt and weak policy credibility inhibit the power of floating rates to insulate the economy from shocks and to grant independence to its policymakers. When a country’s financial stocks are of significant size, market expectations are the fundamental determinant of equilibrium exchange rates and purchasing power parity.

In this article I review Joseph P. Joyce’s thought-provoking book The IMF and global financial crises: Phoenix rising?” (Cambridge University Press, 2012). The book is a comprehensive yet concise appraisal of the IMF’s history of successes and failures in preventing crises, and in dealing with their consequences. The review is an opportunity for expressing some thoughts of my own on the subject, picking on Joyce’s reflection on how to reform the IMF, considering the needs of today’s global economy. The review discusses the role of the IMF’s largest shareholding countries in steering the institution’s strategic direction and action, as well the intellectual capture by the economic paradigm that has long prevailed in the highly financially developed world.

In the highly globalized world economy of our times, where markets are tightly integrated, setting domestic economic policy with a view simply to keeping one’s house in order is no longer optimal. New responsibilities follow for each member of the community of countries from the recognition that the action by one may affect the others. These mutual responsibilities form the core of what we call the ‘Good Global Citizen’ remit of the IMF, a reformed framework for international economic and financial cooperation. This study identifies the new responsibilities, and defines and articulates the rules under the proposed remit.

IMF surveillance of the international monetary and financial system is a global public good. Its effectiveness depends critically on the dynamics that underpin the mechanisms governing the IMF and global finance. These dynamics, in turn, reflect the interests and power of influence of countries (especially the largest), their cooperative attitude and international relations. Assessing the effectiveness of IMF surveillance, therefore, demands a clear understanding of the IMF and global financial governance: improving the former requires strengthening the latter. This study considers how the governance of the IMF and global finance can be reformed to increase the effectiveness of surveillance and to strengthen international financial cooperation. The study proposes a configuration of governance with a clearer allocation of responsibilities and stronger mechanisms of power checks and balances. It identifies new roles for the IMFC and the Executive Board, and calls for strengthening management accountability, in particular by decoupling the dual capacity of the Managing Director as chair of the Executive Board and Chief Executive Officer.