"The debate around modern monetary theory is exciting"

The conventional theory of economic policy is today contradicted by a new approach, says the economist in his column in the "World".

Posted today at 15h26 Time to Reading 4 min.

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Chronic. The conventional theory of economic policy tells us that monetary policy must keep inflation around the central bank's inflation target and that fiscal policy must contribute to maintaining full employment while respecting fiscal solvency. of State. This theory implies that it may sometimes be impossible to ensure full employment, if inflation is higher than the inflation target or if the solvency constraint limits the public deficit.

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But this traditional analysis is today contradicted by a new approach, modern monetary theory (modern monetary theory, or MMT), subject of intense debate in the United States. It is championed in particular by Stephanie Kelton, who was one of Bernie Sanders' economic advisers ("How We Think About Deficit Is Mostly Wrong")., New York Times, October 5, 2017; Paul Krugman Asked Me About Modern Monetary Theory. Here Are 4 Answers », Bloomberg Opinion, 1st March 2019).

"The idea is that the public deficit must be at all times set at the level that ensures full employment, and this deficit must be financed by money creation, which avoids the rise in interest rates."

The idea is that the public deficit must at all times be set at the level that ensures full employment, and this deficit must be financed by money creation, which avoids the rise in interest rates (which the "crowding out effect" linked to public deficits is usually called). This theory has been strongly criticized by famous economists, in particular Paul Krugman and Larry Summers ("The Left's Embrace Of Modern Monetary Theory Is A Recipe For Disaster", The Washington Post, March 4, 2019), yet left-wing economists who think that demand needs to be further supported. Their argument is that the public deficit will lead to hyperinflation if there is limitless monetary creation and, consequently, the depreciation of the exchange rate and imported inflation.

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