Comment on Section 2.3.5 of Wolswijk (2026), "Prohibition of Monetary Financing: An Economic Perspective"

The ECB Occasional Paper’s two-paragraph summary of Modern Monetary Theory is a caricature. The section systematically misstates the operational claims of the MMT literature. It recycles a reading already challenged in a peer-reviewed reply to its own cited source, and rests its account of MMT on a textbook and a blog post rather than the primary operational literature. That is a significant problem for a paper published as an economic analysis in an official research series.

The paper (Wolswijk 2026, §2.3.5) opens by calling MMT a “rather contrarian view” that “strongly support[s] monetary financing.” It attributes a short list of propositions to the theory, notes that MMT “has been heavily criticised (see, for example, Drumetz and Pfister 2021),” and concludes that MMT is not “particularly relevant” to EMU. Each of those moves is problematic, and the problem is not incidental.

Intereconomics published a direct, peer-reviewed reply to Drumetz and Pfister the following spring: Ehnts (2022), “Modern Monetary Theory: The Right Compass for Decision-Making,” addressing the same table of claims line by line, in the same journal. The paper is built almost entirely around characterising MMT’s claims, with Drumetz and Pfister cited as the authority on what those claims are. It relies on that authority without engaging the peer-reviewed reply published against it in the same journal.

What the primary literature actually says

Financing. MMT describes the accounting operations that already occur when a currency-issuing state spends. Describing that sequence is not the same act as advocating a fiscal regime built on it, and that distinction governs the misreadings that follow. What MMT rejects is the requirement that tax or bond operations must precede spending, not the possibility that they occur first, last, or simultaneously in any given instance. The spending operation credits bank accounts directly and creates net financial assets for the non-government sector; institutional arrangements between Treasury and central bank, such as standing overdraft or credit facilities, are designed so that spending is not held hostage to the timing of tax receipts or bond settlement. Ehnts (2022) states the actual MMT position against Drumetz and Pfister’s own reconstruction: on how government expenditure is financed, the original MMT column reads simply “it is not ‘financed.’”

Wolswijk’s characterisation is a strawman: it swaps a description of operations that already occur for a policy proposal to adopt them, then dismisses the substitute rather than the claim MMT actually makes. Mosler and Forstater (1999) set out the vertical/horizontal accounting framework underlying MMT’s claim, and Berkeley et al. (2025) document the equivalent institutional sequence for the UK Exchequer in a peer-reviewed analysis. Wolswijk’s citations include neither. A paper that means to characterise this claim needs to read that literature directly, not relay a paraphrase of a paraphrase.

Bonds and reserves. Drumetz and Pfister hold that under MMT bonds are issued “to distribute income as part of an interest rate maintenance strategy.” Wolswijk follows them on this point. Ehnts’s table is already more precise than that paraphrase: bonds are issued “as part of an interest rate maintenance strategy and/or to satisfy eurozone rules,” a second clause Wolswijk drops entirely. The mechanism itself is also stated backwards. Wolswijk has government bond issuance “increasing bank reserves” and thereby lowering rates. Government spending adds reserves to the banking system (McLeay, Radia and Thomas, 2014). Bond issuance does the opposite. Left unaddressed, a reserve addition from spending pushes the overnight rate down toward the remuneration floor, because banks holding surplus reserves have nowhere else to place them but the interbank market. Bond sales drain that surplus and defend a positive policy rate. This point has been in the primary literature since Mosler (1997). Forstater and Mosler (2005) make the same point at length. In an operating framework where reserves are unremunerated, a currency-issuing government that spends without offsetting bond sales sees the overnight rate move towards zero, because unremunerated excess reserves depress the interbank rate rather than raise it.

Wolswijk has the sign of the transmission mechanism inverted.

Interest rate policy. The claim that “monetary policy should aim for low interest rates so that the government can borrow on favourable conditions” imports a loanable-funds framing. Three distinct claims sit inside MMT’s actual position. First, the policy rate is administered rather than market-determined: the central bank sets it directly, and a monopoly currency issuer is not a price-taker in its own currency (Wray, 2025). Ehnts’s table records this directly: interest rates “are set by the central bank,” not by the market (row 8). Second, MMT prefers a low or zero-rate environment; the literature’s stronger claim is that the natural rate on a fiat currency, with no interest paid on reserves, is zero (Forstater and Mosler, 2005). Third, that preference has specific reasons: a positive rate transfers income to holders of interest-bearing assets, with distributional consequences, and feeds the interest-income channel of inflation that Wolswijk’s own paper sets out a section earlier via Sargent and Wallace (1981). The paper attributes a financing motive to that preference. That motive is not the rationale identified in the literature cited here.

Inflation. The claim that MMT holds inflation to be “not the result of excessive money creation but of real resource constraints” keeps the least distinctive half of the theory. It drops the half that actually separates MMT from the position Wolswijk is contrasting it with. Mosler’s price-level framework, developed within the MMT literature (Mosler 2023), holds that prices are driven in the first instance by the prices the currency-issuing state itself agrees to pay. The currency-issuing state has a distinctive capacity to set the terms on which its own liabilities are accepted in payment. Real-resource constraints are one channel among several, alongside market power, import prices, and institutional wage-setting, by which demand pressure becomes price pressure once capacity limits bind. This is also why the job-guarantee literature (Tcherneva 2020; Wilson 2026) treats a fixed-price buffer-stock employment programme as a price anchor: the anchor is the state’s own pricing behaviour, at whatever scale the buffer stock operates, rather than the size of the money stock.

Central bank independence. MMT’s actual target is narrower than Wolswijk’s summary suggests. The legal separation of treasury and central bank is a political choice; MMT’s dispute is with the further claim that this separation is a technical prerequisite for monetary stability. Wolswijk’s case for independence rests, in part, on that further claim: that independence is what stops government solvency concerns and fiscal dominance from driving monetary policy. The institutional separation itself is left untouched. Ehnts’s table again states the actual position with more precision than Wolswijk’s paraphrase manages: access to central bank financing “depends on the laws” (row 4).

Relevance to the European Monetary Union (EMU). The claim that MMT is “not particularly relevant to the EMU” is close to backward. One section earlier, in §2.3.4, Wolswijk grants that unpleasant monetary arithmetic and the fiscal theory of the price level “also have some relevance for monetary unions with decentralised fiscal policies such as the EMU.” §2.3.5 then dismisses MMT’s relevance to the EMU on the same institutional grounds he has just called relevant for two other theories: a monetary union with centralised monetary policy and national fiscal policy.

Wolswijk’s own paper makes the case against him one section earlier.

The currency issuer/currency user distinction, one of MMT’s central claims, is the analytical tool built to explain exactly that institutional structure: a member state is a currency user with respect to the euro, and only the Eurosystem is the issuer. That institutional fact is what the distinction exists to analyse. Ehnts (2022) states this against Drumetz and Pfister’s own table: access to central bank financing in the eurozone “is therefore limited… at least with the standard rules in place.” That constraint is distinctive to the eurozone: the UK, the US and Japan operate under different arrangements, and MMT uses the contrast to explain the 2010–2012 sovereign debt crisis, including the Greek case. National governments cannot unilaterally instruct the Eurosystem to create euros for their own fiscal use (Treaty on the Functioning of the European Union, Article 123). Emergency liquidity assistance (ELA) to banks is itself capped at the discretion of the ECB’s Governing Council, which maintained the ELA ceiling for Greek banks at its existing level rather than raising it on 28 June 2015, followed by the imposition of capital controls (European Central Bank, 2015). This is precisely the kind of institutional constraint the issuer/user distinction exists to analyse.

The same institutional structure also explains why the ECB’s large-scale secondary-market programmes functionally financed national deficits during the crisis (Mitchell 2015). Wolswijk’s paper has already drawn this charge directly: within days of publication, Mitchell (2026) identified Occasional Paper 397 by name as continuing to deny that the ECB’s bond-buying programmes amounted to funding Eurozone governments.

The shared error

A common analytical error underlies the section: treating a descriptive theory of the payment system as a normative endorsement of a practice called “monetary financing.” Once that conversion is made, the descriptive claim never has to be confronted on its own terms. The descriptive question has been silently converted into a normative one.

That conversion happens at the level of representation. The propositions that §2.3.5 subsequently rejects are Wolswijk’s reconstruction of MMT, not MMT itself. Wolswijk’s account derives from Drumetz and Pfister (2021), whose characterisation had already been challenged, point by point, in the same journal by Ehnts (2022), a reply §2.3.5 does not cite. His citations substitute secondary sources, a single textbook (Mitchell, Wray and Watts, 2016) and a 2025 blog post (Cauneau, 2025), for engagement with the operational papers, Levy Institute working papers, and peer-reviewed journal literature the theory has generated over three decades. Even that textbook citation conflates two distinct works: it gives the title of the authors’ 2016 introductory text (Mitchell, Wray and Watts, 2016) but the publication year of their later, separately titled Macroeconomics (Mitchell, Wray and Watts, 2019).

The residual criticisms Wolswijk lists, discretionary bias, policy lags, and risk-taking from low rates, do not remedy the representational failure. They may be legitimate objections to discretionary fiscal policy or to low interest rates in general, but none of them requires or validates the reconstruction of MMT that the section actually attacks. The Job Guarantee provides a direct theoretical response to the objections concerning discretionary lags and inflationary bias (Tcherneva 2020; Wilson 2026), and Mosler’s asset-side banking regulation proposal provides a direct theoretical response to the risk-taking objection (Mosler 2009).

Return to the EMU and the inversion becomes explicit: the institutional difference between a currency issuer and a currency user is the reason the distinction becomes especially important to a monetary union, not a reason MMT is irrelevant to one. Wolswijk’s own institutional analysis, centralised monetary policy, national fiscal policy, and the ELA episode included, supplies the reason for taking that distinction seriously. Wolswijk’s paper does not refute MMT’s account. It refutes a reconstruction of that account, doing so at exactly the point where its own institutional analysis should have demonstrated MMT’s relevance to the EMU instead.

References

Berkeley, A., Ryan-Collins, J., Tye, R., Voldsgaard, A. and Wilson, N. (2025). The Self-Financing State: An Institutional Analysis of Government Expenditure, Revenue Collection and Debt Issuance Operations in the United Kingdom. Journal of Economic Issues, 59(3), 852–880. https://doi.org/10.1080/00213624.2025.2533726

Cauneau, R. (2025). Article 123 of the Treaty on the Functioning of the European Union: the triumph of an ideology. MMT France blog, 16 June.

Drumetz, F. and Pfister, C. (2021). Modern Monetary Theory: A Wrong Compass for Decision-Making. Intereconomics, 56(6), 355–361.

Ehnts, D. (2022). Modern Monetary Theory: The Right Compass for Decision-Making. Intereconomics, 57(2), 128–134. https://doi.org/10.1007/s10272-022-1041-x

European Central Bank (2015). ELA to Greek Banks Maintained at Its Current Level. Press release, 28 June. https://www.ecb.europa.eu/press/pr/date/2015/html/pr150628.en.html

Forstater, M. and Mosler, W. (2005). The Natural Rate of Interest Is Zero. Journal of Economic Issues, 39(2), 535–542. https://doi.org/10.1080/00213624.2005.11506832

McLeay, M., Radia, A. and Thomas, R. (2014). Money Creation in the Modern Economy. Bank of England Quarterly Bulletin, 2014 Q1, 14–27.

Mitchell, W. (2015). Eurozone Dystopia: Groupthink and Denial on a Grand Scale. Edward Elgar Publishing. ISBN 978-1-78471-665-3.

Mitchell, W. (2026). ECB research paper continues to deny that bond buying programmes essentially funded the Eurozone governments. Billy Blog, 17 August. https://billmitchell.org/blog/?p=63323

Mitchell, W., Wray, L. R. and Watts, M. (2016). Modern Monetary Theory and Practice: An Introductory Text. Centre of Full Employment and Equity, University of Newcastle. ISBN 978-1-530-33879-5.

Mitchell, W., Wray, L. R. and Watts, M. (2019). Macroeconomics. Macmillan. ISBN 978-1-137-61066-9.

Mosler, W. (1997). Full Employment and Price Stability. Journal of Post Keynesian Economics, 20(2), 167–182. https://doi.org/10.1080/01603477.1997.11490146

Mosler, W. (2009). Proposals for the Banking System, Treasury, Fed, and FDIC. Reproduced in New Economic Perspectives, 15 February 2010.

Mosler, W. (2023). A Framework for the Analysis of the Price Level and Inflation. In L. R. Wray, P. Armstrong, S. Holland, C. Jackson-Prior and P. Plumridge (Eds.), Modern Monetary Theory (Chapter 4). Edward Elgar Publishing. https://doi.org/10.4337/9781802208092.00012

Mosler, W. and Forstater, M. (1999). A General Framework for the Analysis of Currencies and Commodities. In P. Davidson and J. Kregel (Eds.), Full Employment and Price Stability in a Global Economy (pp. 166–177). Edward Elgar Publishing.

Sargent, T. and Wallace, N. (1981). Some Unpleasant Monetarist Arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5, 1–17.

Tcherneva, P. (2020). The Case for a Job Guarantee. Polity Press. ISBN 978-1-509-54210-9.

Treaty on the Functioning of the European Union (2012). Official Journal of the European Union, C 326/47, Article 123.

Wilson, N. (2026). The Minimum Wage Jobs Framework. Zenodo. https://doi.org/10.5281/zenodo.17913569

Wolswijk, G. (2026). Prohibition of Monetary Financing: An Economic Perspective. ECB Occasional Paper Series, No. 397. https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op397.en.pdf

Wray, L. R. (2025). Understanding Modern Money Theory: Money and Credit in Capitalist Economies. Edward Elgar Publishing. ISBN 978-1-80037-514-7.

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