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Monday, January 10, 2022
Reflections on MMT Policy Practice in the United States
ANBOUND

With the Federal Reserve’s monetary policy taking a sharp turn and the acceleration of its withdrawal from easing, inflation is increasingly becoming the main concern for central banks globally. European Central Bank, among other central banks, is beginning to consider tightening policies and this will signal a major shift in global monetary policy. This also puts Modern Monetary Theory (MMT), which has gained popularity during the COVID-19 pandemic, in an awkward position. Although the U.S. government is still promoting its economic stimulus plan, with a greatly reduced scale, it is facing criticism from inside and outside the country. Meanwhile, it is also facing the expansion of its fiscal deficit and the increase of debt pressure. Formulating fiscal policy in the face of rising inflation is therefore, a vital issue that governments around the world need to consider.

Looking at the process of countries pushing to expand fiscal spending and stimulating the economy to deal with the impact of COVID-19, the policy effect of this combination of fiscal and monetary policies appears to be successful. This is because it not only brings about a rapid economic recovery but, to some extent, it also avoids the impact of the pandemic on businesses and people. High inflation means that conventional monetary theoretical frameworks are still in play, implying that MMT still cannot address its theoretical flaws. However, contrary to the stagflation outlook mentioned in some forecasts, recent U.S. employment data shows that the unemployment rate is entering unprecedented low levels, indicating that full employment is becoming a reality. This shows that promoting MMT policy has a positive effect on economic growth. The current problem is that high inflation has shown that monetary expansion still has its boundaries. The Fed has to speed up the pace of exiting easing and shrinking its balance sheet in advance for the country to return to the path of traditional monetary policy and end its MMT policy.

This implementation of the MMT policy is an attempt to change the macro policy framework. Its significance still lies in the effect of the integration and coordination of fiscal and monetary policies on the economy and the financial system. In the meantime, the boundaries of the “cross-border” implementation of relevant policies have become clearly visible. Researchers at ANBOUND once pointed out that neither New Keynesianism nor MMT has been freed from the constraints of monetarism. Monetary and fiscal policies will confront serious challenges in the medium and long run, according to the Bank for International Settlements (BIS), and must be normalized in the medium term when conditions allow, with a margin of safety re-established while operating within a "stability corridor".

If monetary policy begins to change and inflation is high, the new round of stimulus of the U.S. government is going to face a difficult situation. The inflation problem means that its fiscal plan will no longer be rolled out as quickly as it was during the pandemic, while the recovery of economic growth has also reduced the urgency and necessity of fiscal stimulus. However, this does not mean that the U.S. government will embark on a fiscal policy contraction. The risk brought about by the policy exit is no less than policy implementation. The U.S. still intends to promote the economic growth brought about by the fiscal stimulus to achieve future rebalancing and the safe exit from stimulus policy. The U.S. is not worried about the government's credit and liabilities, and fiscal expansion is still a means to adjust the economy. Although the U.S. government will continue the existing path of fiscal expansion, the specific stimulus method will be different from the universal “flood-like stimulus” during the pandemic, and will gradually move towards a long-term and precise adjustment method.

At this stage, the relevant conclusions are becoming increasingly clear. First, the inflation problem is still one of the main goals of the central bank's monetary policy, and the purported "infinite" easing promoted by the MMT theory still has its limit. Second, the fiscal expansion promoted by the MMT theory is staged, and long-term economic development would still require structural adjustment to be realized. Simply promoting fiscal expansion cannot solve the structural contradictions of the economy. The focus is on re-establishing a healthy relationship between monetary and fiscal policies so as to avoid unforeseen consequences for the macroeconomy in policy practice.

ANBOUND is of the opinion that while the practice of MMT theory is not a complete success, it is neither a complete failure. On the one hand, although the economic and financial environment has undergone tremendous changes, the logic of basic economic operation and theoretical analysis methods have not changed. On the other hand, the effects micro policies of various countries in coping with the COVID-19 pandemic show that the integration of fiscal and monetary policies has been further deepened, which has a greater effect on economic growth and stability. After the unprecedented expansion of both economic and monetary space, it is difficult for the macro policy framework to return to the traditional model. Consequently, whether through theoretical research or policy implementation, ongoing efforts are required to resolve the contradictions between money and the economy, as well as the contradictions between fairness and efficiency in wealth distribution, in order to achieve balance and coordination between economic growth and inflation.

Final analysis conclusion:

Macro policy practice in the context of MMT has indeed played a key role in responding to the impact of the pandemic, but it has also brought about the expected inflation problem. Therefore, it would be necessary for policymakers to seek the balance between the coordination of monetary and fiscal policies to achieve economic balance and growth.

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