In recent days, the Turkish Lira ₺ has been depreciating a lot. In fact, the President ordered interest rate cuts as he thought it would stop the crash but that made the problem worse. The central bank has sold foreign reserves to try to stop the fall but it doesn’t have enough reserves.
For now, I just wanted to record a ridiculous proposal by Warren Mosler to cut the policy rate to zero, something he has been advocating for every country with floating exchange rate since forever.
On August 31st this year, he tweeted:
I’ve proposed that Turkey cut the policy rate to 0 to reduce inflation and firm the lira.
Randall Wray, in a chapter What A Long, Strange Trip It’s Been: Can We Muddle Through Without Fiscal Policy? in the book Post-Keynesian Principles of Economic Policy written in 2006 made this claim:
… for such a country [a sovereign nation with a floating currency] (even Turkey), both a budget deficit and a current account deficit are indefinitely sustainable.
Clearly, the neochartalists should accept the shortcomings in their theory. There’s a good literature in Post-Keynesian theory about external constraints.
Neochartalists start with a wrong claim “imports are a benefit, exports a cost”. In that they make it look like mainstream theory is for restriction of international trade whereas in reality it’s just the opposite. By starting completely wrong, they reach the most ridiculous of conclusions. Turkey has to improve its balance of payments and international investment position by improving its trade balance. Zero interest rate won’t help.