Along with Eric Tymoigne, I will be on the “pro-” side of a “pro-/con-” Modern Monetary Theory (MMT) panel at the online part of the annual Canadian Economic Association (CEA) conference (on May 30, the live conference is in early June in my old hometown of Winnipeg).
Blowing the trumpet a bit here Brian, but chapter 5 and chapter 6 of the new GIMMS book (Modern Monetary Theory: Key Insights, Leading Thinkers)cover the external economy and the mathematics of the "MMT-as-currency-killer" argument.
AFAICT the problem heterodox people have with MMT is it doesn't subscribe to their fixed/pseudo fixed exchange rate model - where government remains just another actor begging resources from the private sector. In this model the 'floating rate' is between Treasury and the central bank via the 'bond discount' mechanism and the adjustment is supposed to be government buying more or less stuff based upon what the 'market' is telling them.
Instead MMT pushes the floating rate fully out to the currency area border. ZIRP makes the exchange rate between Treasury and the central bank fixed (no discount). Necessarily this means changes in the terms of trade show up in variation in the price and/or quantity of discretionary domestic imports, rather than trying to prevent changes by manipulating financial exports via interest rate changes.
Problem is that the Canadian Establishment has been selling a story that Canada was on the edge of default in 1994. A generic macro argument is not going to be enough here, that story has to be taken head on.
I’d like to know of any serious study of the Martin-Chrétien policies. Canada’s fiscal re-set was surely one of the most dramatic in the western world?
Interestingly, I’ve just reviewed my (Ontario) municipality’s tax-take. It starts with Harris’s ‘amalgamation’, in 1998 - precipitated by Federal downloading and advertised as cost- saving. Municipal taxes doubled in real terms from 1998 to 2005 and have since increased steadily, in real terms, by 3% pa, a trajectory we’re still on.
We see arguments over fiscal and monetary policy as short-term ‘corrections’ to a better future. Not from where I’m sitting. What I see is rising inequality, increasing local taxes, collapsing Provincial services, and an obsessive debate at the Federal level as to whether we should wholly disclaim the COVID fiscal stimuluses (Pollievre) and most of the corporate press) or apologize for them (Trudeau).
But the nub of the issue is power. I take it as self-evident that MMT is correct in saying fiat governments spend first and do not need to tax or borrow. But I’ve come to realize, too, that the deficit myth is itself a myth. If governments are prevented from taxing back, then they can’t go on spending.
I take it as self evident, too, that money spent into the economy and not (yet) used to pay taxes is not the national debt but the national savings, part of the national money supply. And ever since we went off the gold standard (when reserves could be exchanged for gold) there is no need whatsoever to pay anyone to store tax-credits, ie, pay interest on government bonds or even have government bonds.
In means laughing at the notion that Central Banks are necessary - all their functions can be rolled into the Treasury - except perhaps regulating our vastly bloated financial sector. And wholly rejecting the notion that interest rates can control inflation through unemployment.
Which brings us back to MMT’s full employment vs the notion that government spending to empower the real economy must be coupled with either no taxation of the wealthy or massive interest payments to them - heads they win and tails we lose.
The last 40 years has been a hijack in which wealth has been inexorably transferred up, our productive capacity ruined, and our economy finacialized so that most people no longer pay taxes, they pay interest.
MMT is theory not policy but it certainly points the way to throwing off the yoke of over-wealthy oligarchs and giving us a chance of dealing with the looming mega-crisis.
The Canadian fiscal tightening was pretty dramatic, but Europe might have seen similar contractions in that era. I don’t have any references on that, and that tightening policy is somewhat out of scope - the issue is the alleged crisis.
I’m not sure what you mean by ‘alleged crisis’ - I thought your post was about the poor quality of debate over MMT.
If the ‘crisis’ is over supply side inflation following the most successful fiscal intervention in the history of economics, then I’d say the crisis commentary is as banal as the non-debate over the fundamentals of MMT.
I pursued the ‘tightening’ or austerity track because Canada’s unique experience is never mentioned. It’s done a generation of harm yet there is still the drum beat of more - the only way to a prosperous economy is to make working people poorer, more in debt, and more unemployed. To me, this is the crisis and it’s not alleged, it’s ‘independent’ Bank of Canada policy.
That said, good luck at the conference and maybe ask some of the nay (or is it neigh) sayers how they think monetary policy works.
The "crisis" is the alleged near default of the Government of Canada, and/or the near collapse of the Canadian dollar, which provides a counter-point to MMT arguments about fiscal space.
The austerity policies were more important (and the alleged crisis provides the excuse for them), but there's no theoretical debate about what happened, rather, was it a good idea?
Just saying, I personally knew the person at one of the rating agencies on Wall St, who covered Canada. His view, at the time, was it was all nonsense. I doubt he’s become an MMTer though, although you never know.
But you’re right it’s a fascinating piece of history someone should cover. Chrétien and Martin are still celebrated for their courage and Polyester is shouting for a repeat performance.
My own dabbling in our municipal tax take since 1998 - taxes in real terms doubled in 8 years then settled into a 3%pa increase, again in constant dollars, which means we’re heading to another real doubling in the current term of Council - surprised me. I’m starting to look into the trajectories of federal and provincial transfers but it seems extremely convoluted and hard to figure out. But one way or another it all goes back to Chrétien and Martin and there’s a story there to be told.
I’m left feeling somebody out there, somewhere, must have looked at this and I live in hope I’ll stumble upon it soon.
In the meantime, SVB has collapsed. Funny, I thought it was going to be construction workers that were going to be made unemployed to bring down inflation, despite Ford planning to build-build-build (everything from highways to LTCHs to SMRs to BESSs to 1.5 million homes) with never a thought to the actual capacity of ON’s construction sector - another MMT insight. Anyway, it’s Silicon Valley that’s collapsed instead - another round of QE except that it’s too late.
We’re in very safe hands aren’t we? Not so much has changed since Chrétien’s time.
With respect to the Omran and Zelmer article, I agree with you that it "is one of the most sympathetic treatments [we] have seen from mainstream economists who are also critics", and that "[t]heir focus is on policy recommendations, and not academic theory ...."
I don't know enough about current exchange rate theory or the Canadian economy to comment with confidence on their policy recommendations. However, a couple of their statements struck me as questionable.
They say they are conducting "an examination of whether it is possible to dispense with the conduct of independent monetary policy by central banks, as MMT proposes." (3) My initial reaction was, "Huh? Does MMT say *that*?" I'll grant you that MMT characterizes "central bank independence" as a shibboleth and believes that the effectiveness and power of conventional monetary policy is overstated. But I don't think that means that MMT is arguing for no central bank role whatsoever in monetary policy.
They go on to say, "[T]here are significant risks for a country such as Canada to issue debt with impunity on its own when the economy is weak, unless the money raised is likely to be spent in a way that will generate future income to service the additional debt. Going alone and issuing debt to maintain current living standards, focusing on encouraging present consumption over investment, would be risky even if the economy were operating below potential ...." (9)
Once again, my reaction was, "Huh? Does MMT advocate 'borrowing' to encourage present consumption over investment?" Which MMTers do Omran and Zelmer believe are making that argument? If anything, MMT advocates are alert to the possibility that, in order to make a just transition to a non-fossil-fuel-based economy (a.k.a., a Green New Deal), the government is likely to need to persuade the public to accept restricted consumption for a limited period of time. See Y. Nersisyan and L.R. Wray, "How to Pay for the Green New Deal," https://www.levyinstitute.org/publications/how-to-pay-for-the-green-new-deal, 2019.
Omran and Zelmer also get Randy Wray's name wrong. He's L. Randall Wray, not "Randal L. Wray". (4)
The banking crisis has interfered with my covering that article.
The “dispensing with independent monetary policy” seems to be a combination of loudly asserting that central bank independence matters, and the downgrading of monetary policy (e.g., locking rates at zero). That’s not really a Canada-specific complaint, rather it’s an ongoing debate about MMT.
I think the consumption bit probably refers to an alleged defect of using fiscal policy as a means to fine tune growth - there is a policy bias towards consumption. I think this is one of the complaints about Old Keynesian policy, but it’s a pretty ancient one. Not germane to MMT, but the authors want to conflate Old Keynesians with MMT.
Yes, there was, still is, regulatory failure re pension funding. But could you explain what you mean by "fragile state of the gilt market" to a layperson like me?
I’m not plugged in to global capital markets, but the liquidity issues facing pension funds made it into the FT months earlier. Her Majesty’s Treasury should have been well aware that it was possible that there would be wild overreactions to the possibility of higher rates.
Not sure who this was directed at, but yes, they eventually stabilised things and the whole thing went away. They should have done the exact same thing earlier, so that the loons in the press would not go nuts. But if we want to go back further, whomever was regulating pensions and derivatives should have thought more carefully about the risks pension funds were running, and the BoE should have been more aware of them. At the same time, it appears that Truss didn’t listen to the bureaucrats about the fragile state of the gilt market.
No two accounts of the Truss debacle that I have read agree about just what happened. But all seem to agree that she paid the price of trying to be heterodox and the bond vigilantes won. Can you explain the MMT view? What would Warren Mosler have done?
She wanted to run loose fiscal policy. That’s not really “heterodox” in the way the term is used in economic theory - it’s just a policy choice.
The blowup was the result of bad liquidity management at UK pension funds. Obviously, not having pension funds blow themselves up would be great. But once the crisis started, you have no real choice but to create an irregular liquidity facility to bail them out. Pension funds have a lot of capital, so it’s not as if they are major credit risks.
Otherwise, floating currencies float. The chattering classes in the UK really need to figure out that a floating exchange rate means that the exchange rate is allowed go down without it being a crisis.
The Treasurer or Chancellor of the Exchequer in this case can always get their way if they so choose. This relies on them knowing this though. The bond vigilantes won because they allowed them to. If Mosler was a Tory, he would have stared the Bank of England down & threatened them with various sanctions & regulations available. It’s just like setting an interest rate target or a yield curve control. You can allow markets to decide or you can do open market operations & QE to get things to go where you want them to go instead of the market. You’d just be doing it from the Treasury side instead. So in short a naive & weak government uncertain of their capabilities or extremely naive faith in markets.
To be sure, if iPhones and foreign holidays increase in price, then I wouldn't shed a tear, but if basic foodstuffs do so then at the very least that's a big political problem.
I cannot give you direct help but I can say the critique of MMT around the external constraint is the only valid area I see to critique MMT. Also I don’t think those critiques hold as Eric Tymoigne demonstrates with his Seven Replies to critiques & Bill Mitchell also demonstrates In relationship to “Thirlwall’s law” but that said if that’s the area of critique, I’m willing to give the con side a listen because as I said it is the only valid area to critique as far as I’m concerned.
Sorry, I don’t know about the 90s & fiscal stuff in Canada. I can always provide the generic version. MMT does not prevent bad policy choices.
I will be interested in the "external constraint" debate. This is always the first concern of those friends I persuade to take an interest in MMT. In the UK we import 50 percent of our food (or 80 percent depending on definitions) so any loss of currency value would immediately hit those on the lowest incomes first.
I know that MMT should NOT spook the markets, but if they see anything unconventional coming, wouldn't it be rash not to be prepared for a speculative flight from the currency? The Liz Truss experience in the UK is now burned into everyone's consciousness here and SHE was a right wing neoliberal! So speculation must be banned and there must be capital/exchange controls. But if an MMT inclined political party looked like it would gain power, a lot of damage could be done before they could stop it. Has any research been done on types of capital controls and their effectiveness? How quickly could they be enacted? What adverse consequences might there be? Has anyone wargamed the scenarios?
The argument (that I expect to hear) was that this is what happened in the early 1990s with a loose-spending “Old Keynesian” government, and not that it might happen.
But yes, currency markets are markets, and can do any number of things. If you loosen fiscal policy, a pretty typical reaction is a short-term drop in the currency. The question is: so what? The UK’s problem is that pretty much everyone freaks out about currency drops, due to their fixed exchange rate experiences of periodic Sterling crises after the war. They’ve only been floating since the early 1990s.
Yes, which is just the exchange rate doing its job
To quote Bill Mitchell
“ In a fixed exchange rate system, where the central bank has to manage its foreign currency reserves to maintain the agreed parity with other currencies, the balance of payments is a constraining influence on real GDP growth.
…
However, in a flexible exchange rate system, no such constraint exists. Instead, movements in the exchange rate respond to balance of payments states.“
If Liz Truss stood her ground and stared down the Bank of England, that wouldn’t have happened. Just a sign of a weak government. I can’t speak for wargaming but looking at how Iceland reacted after 2008 and how Russia is acting now are good examples of capital controls that may be used. It is important to remember the word sovereign in sovereign currency, it determines how the currency can be used.
As for speed of enactment, it depends on institutional setup. I hope this helps.
No two accounts of the Truss debacle that I have read agree on what happened, except that she went heterodox and the bond vigilantes won, and let that be a lesson to us all. If you can give me the MMT take on it, I'd be grateful. What would Warren Mosler have done?
Blowing the trumpet a bit here Brian, but chapter 5 and chapter 6 of the new GIMMS book (Modern Monetary Theory: Key Insights, Leading Thinkers)cover the external economy and the mathematics of the "MMT-as-currency-killer" argument.
https://doi.org/10.4337/9781802208092.00013
https://doi.org/10.4337/9781802208092.00014
AFAICT the problem heterodox people have with MMT is it doesn't subscribe to their fixed/pseudo fixed exchange rate model - where government remains just another actor begging resources from the private sector. In this model the 'floating rate' is between Treasury and the central bank via the 'bond discount' mechanism and the adjustment is supposed to be government buying more or less stuff based upon what the 'market' is telling them.
Instead MMT pushes the floating rate fully out to the currency area border. ZIRP makes the exchange rate between Treasury and the central bank fixed (no discount). Necessarily this means changes in the terms of trade show up in variation in the price and/or quantity of discretionary domestic imports, rather than trying to prevent changes by manipulating financial exports via interest rate changes.
Problem is that the Canadian Establishment has been selling a story that Canada was on the edge of default in 1994. A generic macro argument is not going to be enough here, that story has to be taken head on.
I’d like to know of any serious study of the Martin-Chrétien policies. Canada’s fiscal re-set was surely one of the most dramatic in the western world?
Interestingly, I’ve just reviewed my (Ontario) municipality’s tax-take. It starts with Harris’s ‘amalgamation’, in 1998 - precipitated by Federal downloading and advertised as cost- saving. Municipal taxes doubled in real terms from 1998 to 2005 and have since increased steadily, in real terms, by 3% pa, a trajectory we’re still on.
We see arguments over fiscal and monetary policy as short-term ‘corrections’ to a better future. Not from where I’m sitting. What I see is rising inequality, increasing local taxes, collapsing Provincial services, and an obsessive debate at the Federal level as to whether we should wholly disclaim the COVID fiscal stimuluses (Pollievre) and most of the corporate press) or apologize for them (Trudeau).
But the nub of the issue is power. I take it as self-evident that MMT is correct in saying fiat governments spend first and do not need to tax or borrow. But I’ve come to realize, too, that the deficit myth is itself a myth. If governments are prevented from taxing back, then they can’t go on spending.
I take it as self evident, too, that money spent into the economy and not (yet) used to pay taxes is not the national debt but the national savings, part of the national money supply. And ever since we went off the gold standard (when reserves could be exchanged for gold) there is no need whatsoever to pay anyone to store tax-credits, ie, pay interest on government bonds or even have government bonds.
In means laughing at the notion that Central Banks are necessary - all their functions can be rolled into the Treasury - except perhaps regulating our vastly bloated financial sector. And wholly rejecting the notion that interest rates can control inflation through unemployment.
Which brings us back to MMT’s full employment vs the notion that government spending to empower the real economy must be coupled with either no taxation of the wealthy or massive interest payments to them - heads they win and tails we lose.
The last 40 years has been a hijack in which wealth has been inexorably transferred up, our productive capacity ruined, and our economy finacialized so that most people no longer pay taxes, they pay interest.
MMT is theory not policy but it certainly points the way to throwing off the yoke of over-wealthy oligarchs and giving us a chance of dealing with the looming mega-crisis.
The Canadian fiscal tightening was pretty dramatic, but Europe might have seen similar contractions in that era. I don’t have any references on that, and that tightening policy is somewhat out of scope - the issue is the alleged crisis.
Thanks for a gracious reply.
I’m not sure what you mean by ‘alleged crisis’ - I thought your post was about the poor quality of debate over MMT.
If the ‘crisis’ is over supply side inflation following the most successful fiscal intervention in the history of economics, then I’d say the crisis commentary is as banal as the non-debate over the fundamentals of MMT.
I pursued the ‘tightening’ or austerity track because Canada’s unique experience is never mentioned. It’s done a generation of harm yet there is still the drum beat of more - the only way to a prosperous economy is to make working people poorer, more in debt, and more unemployed. To me, this is the crisis and it’s not alleged, it’s ‘independent’ Bank of Canada policy.
That said, good luck at the conference and maybe ask some of the nay (or is it neigh) sayers how they think monetary policy works.
The "crisis" is the alleged near default of the Government of Canada, and/or the near collapse of the Canadian dollar, which provides a counter-point to MMT arguments about fiscal space.
The austerity policies were more important (and the alleged crisis provides the excuse for them), but there's no theoretical debate about what happened, rather, was it a good idea?
Ah, of course.
Just saying, I personally knew the person at one of the rating agencies on Wall St, who covered Canada. His view, at the time, was it was all nonsense. I doubt he’s become an MMTer though, although you never know.
But you’re right it’s a fascinating piece of history someone should cover. Chrétien and Martin are still celebrated for their courage and Polyester is shouting for a repeat performance.
My own dabbling in our municipal tax take since 1998 - taxes in real terms doubled in 8 years then settled into a 3%pa increase, again in constant dollars, which means we’re heading to another real doubling in the current term of Council - surprised me. I’m starting to look into the trajectories of federal and provincial transfers but it seems extremely convoluted and hard to figure out. But one way or another it all goes back to Chrétien and Martin and there’s a story there to be told.
I’m left feeling somebody out there, somewhere, must have looked at this and I live in hope I’ll stumble upon it soon.
In the meantime, SVB has collapsed. Funny, I thought it was going to be construction workers that were going to be made unemployed to bring down inflation, despite Ford planning to build-build-build (everything from highways to LTCHs to SMRs to BESSs to 1.5 million homes) with never a thought to the actual capacity of ON’s construction sector - another MMT insight. Anyway, it’s Silicon Valley that’s collapsed instead - another round of QE except that it’s too late.
We’re in very safe hands aren’t we? Not so much has changed since Chrétien’s time.
With respect to the Omran and Zelmer article, I agree with you that it "is one of the most sympathetic treatments [we] have seen from mainstream economists who are also critics", and that "[t]heir focus is on policy recommendations, and not academic theory ...."
I don't know enough about current exchange rate theory or the Canadian economy to comment with confidence on their policy recommendations. However, a couple of their statements struck me as questionable.
They say they are conducting "an examination of whether it is possible to dispense with the conduct of independent monetary policy by central banks, as MMT proposes." (3) My initial reaction was, "Huh? Does MMT say *that*?" I'll grant you that MMT characterizes "central bank independence" as a shibboleth and believes that the effectiveness and power of conventional monetary policy is overstated. But I don't think that means that MMT is arguing for no central bank role whatsoever in monetary policy.
They go on to say, "[T]here are significant risks for a country such as Canada to issue debt with impunity on its own when the economy is weak, unless the money raised is likely to be spent in a way that will generate future income to service the additional debt. Going alone and issuing debt to maintain current living standards, focusing on encouraging present consumption over investment, would be risky even if the economy were operating below potential ...." (9)
Once again, my reaction was, "Huh? Does MMT advocate 'borrowing' to encourage present consumption over investment?" Which MMTers do Omran and Zelmer believe are making that argument? If anything, MMT advocates are alert to the possibility that, in order to make a just transition to a non-fossil-fuel-based economy (a.k.a., a Green New Deal), the government is likely to need to persuade the public to accept restricted consumption for a limited period of time. See Y. Nersisyan and L.R. Wray, "How to Pay for the Green New Deal," https://www.levyinstitute.org/publications/how-to-pay-for-the-green-new-deal, 2019.
Omran and Zelmer also get Randy Wray's name wrong. He's L. Randall Wray, not "Randal L. Wray". (4)
The banking crisis has interfered with my covering that article.
The “dispensing with independent monetary policy” seems to be a combination of loudly asserting that central bank independence matters, and the downgrading of monetary policy (e.g., locking rates at zero). That’s not really a Canada-specific complaint, rather it’s an ongoing debate about MMT.
I think the consumption bit probably refers to an alleged defect of using fiscal policy as a means to fine tune growth - there is a policy bias towards consumption. I think this is one of the complaints about Old Keynesian policy, but it’s a pretty ancient one. Not germane to MMT, but the authors want to conflate Old Keynesians with MMT.
Yes, there was, still is, regulatory failure re pension funding. But could you explain what you mean by "fragile state of the gilt market" to a layperson like me?
I’m not plugged in to global capital markets, but the liquidity issues facing pension funds made it into the FT months earlier. Her Majesty’s Treasury should have been well aware that it was possible that there would be wild overreactions to the possibility of higher rates.
I thought the BoE HAD intervened, buying bonds to save the pension funds. What else should they have done?
Not sure who this was directed at, but yes, they eventually stabilised things and the whole thing went away. They should have done the exact same thing earlier, so that the loons in the press would not go nuts. But if we want to go back further, whomever was regulating pensions and derivatives should have thought more carefully about the risks pension funds were running, and the BoE should have been more aware of them. At the same time, it appears that Truss didn’t listen to the bureaucrats about the fragile state of the gilt market.
No two accounts of the Truss debacle that I have read agree about just what happened. But all seem to agree that she paid the price of trying to be heterodox and the bond vigilantes won. Can you explain the MMT view? What would Warren Mosler have done?
She wanted to run loose fiscal policy. That’s not really “heterodox” in the way the term is used in economic theory - it’s just a policy choice.
The blowup was the result of bad liquidity management at UK pension funds. Obviously, not having pension funds blow themselves up would be great. But once the crisis started, you have no real choice but to create an irregular liquidity facility to bail them out. Pension funds have a lot of capital, so it’s not as if they are major credit risks.
Otherwise, floating currencies float. The chattering classes in the UK really need to figure out that a floating exchange rate means that the exchange rate is allowed go down without it being a crisis.
The Treasurer or Chancellor of the Exchequer in this case can always get their way if they so choose. This relies on them knowing this though. The bond vigilantes won because they allowed them to. If Mosler was a Tory, he would have stared the Bank of England down & threatened them with various sanctions & regulations available. It’s just like setting an interest rate target or a yield curve control. You can allow markets to decide or you can do open market operations & QE to get things to go where you want them to go instead of the market. You’d just be doing it from the Treasury side instead. So in short a naive & weak government uncertain of their capabilities or extremely naive faith in markets.
To be sure, if iPhones and foreign holidays increase in price, then I wouldn't shed a tear, but if basic foodstuffs do so then at the very least that's a big political problem.
I cannot give you direct help but I can say the critique of MMT around the external constraint is the only valid area I see to critique MMT. Also I don’t think those critiques hold as Eric Tymoigne demonstrates with his Seven Replies to critiques & Bill Mitchell also demonstrates In relationship to “Thirlwall’s law” but that said if that’s the area of critique, I’m willing to give the con side a listen because as I said it is the only valid area to critique as far as I’m concerned.
Sorry, I don’t know about the 90s & fiscal stuff in Canada. I can always provide the generic version. MMT does not prevent bad policy choices.
I will be interested in the "external constraint" debate. This is always the first concern of those friends I persuade to take an interest in MMT. In the UK we import 50 percent of our food (or 80 percent depending on definitions) so any loss of currency value would immediately hit those on the lowest incomes first.
Here’s my generic take on it if you are interested https://modernmoney.wordpress.com/faqs-2/#14
I know that MMT should NOT spook the markets, but if they see anything unconventional coming, wouldn't it be rash not to be prepared for a speculative flight from the currency? The Liz Truss experience in the UK is now burned into everyone's consciousness here and SHE was a right wing neoliberal! So speculation must be banned and there must be capital/exchange controls. But if an MMT inclined political party looked like it would gain power, a lot of damage could be done before they could stop it. Has any research been done on types of capital controls and their effectiveness? How quickly could they be enacted? What adverse consequences might there be? Has anyone wargamed the scenarios?
The argument (that I expect to hear) was that this is what happened in the early 1990s with a loose-spending “Old Keynesian” government, and not that it might happen.
But yes, currency markets are markets, and can do any number of things. If you loosen fiscal policy, a pretty typical reaction is a short-term drop in the currency. The question is: so what? The UK’s problem is that pretty much everyone freaks out about currency drops, due to their fixed exchange rate experiences of periodic Sterling crises after the war. They’ve only been floating since the early 1990s.
Yes, which is just the exchange rate doing its job
To quote Bill Mitchell
“ In a fixed exchange rate system, where the central bank has to manage its foreign currency reserves to maintain the agreed parity with other currencies, the balance of payments is a constraining influence on real GDP growth.
…
However, in a flexible exchange rate system, no such constraint exists. Instead, movements in the exchange rate respond to balance of payments states.“
https://billmitchell.org/blog/?p=32931
If Liz Truss stood her ground and stared down the Bank of England, that wouldn’t have happened. Just a sign of a weak government. I can’t speak for wargaming but looking at how Iceland reacted after 2008 and how Russia is acting now are good examples of capital controls that may be used. It is important to remember the word sovereign in sovereign currency, it determines how the currency can be used.
As for speed of enactment, it depends on institutional setup. I hope this helps.
No two accounts of the Truss debacle that I have read agree on what happened, except that she went heterodox and the bond vigilantes won, and let that be a lesson to us all. If you can give me the MMT take on it, I'd be grateful. What would Warren Mosler have done?