Modern Monetary Theory (MMT) preaches fiscal stimulus and monetization of public debt in good times and bad to support full employment. The emergency response to the COVID-19 crisis is not MMT; it is large but temporary governmental support for economies that have suffered a severe external shock. There are, however, examples of countries that have adopted MMT-like policies on a continuous basis, even during expansions. Italy during the 1970’s is one, and it has yet to escape the negative consequences.
MMT postulates that, in countries with unilateral control of their currencies, monetary and fiscal policy can work in tandem to promote full employment at all times. The government spends what it takes to support aggregate demand and job creation, and the central bank monetizes much of the government’s debt and maintains a liberal monetary environment to promote borrowing and growth. The only variable that must be watched is inflation. So long as it remains within an acceptable range, MMT contends there’s no reason for government officials to worry about the size of annual budget deficits, or even about the level of accumulated public debt. It is only when inflation threatens to get out of hand that fiscal restraint might become necessary.
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