Monetary policy reaches its limits: time to get fiscal?
Ultra low interest rates have led many to conclude that monetary policy can no longer be relied upon to underpin the world economy. Governments should boost spending and cut taxes without worrying about the deficit until after inflation picks up.
Amongst economists, the most extreme proponents of fiscal policy are advocates of “Modern Monetary Theory” (MMT), several of whom are now serving as economic advisers to Democrat politicians in the United States. MMT argues that a country that issues its own currency cannot run out of money and therefore does not need to worry about the path of government debt. Instead of quantitative easing (QE) being used to buy government debt, it should be used to finance government spending. If inflation did eventually rise, higher taxes could be used to rein in spending and cool price pressures. Given that massive doses of QE by the world’s leading central banks have failed to generate much inflation since the global financial crisis, there is an implicit hope that inflation might stay low.
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The Boris Johnson government’s fiscal commitment is so far nearly £30 billion = 1.5% of GDP.