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Modern Monetary Theory and the Policy Response to COVID-19

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  • Graham Bird
  • Eric Pentecost
  • Thomas D. Willett

Abstract

The COVID-19 pandemic has raised questions about the design of fiscal and monetary policy to assist economic recovery. Modern monetary theory (MMT) strongly argues in favour of substantial and fairly persistent fiscal expansion, claiming that there is neither a near-term capacity constraint, nor a financial one. MMT is, however, not particularly ‘modern’. Many of the basic ideas that it promulgates can be found in fairly standard neo-Keynesian analysis. Advocates of MMT unwisely downplay the potential problems associated with inflation, financial instability and the balance of payments. They also are too dismissive of central bank independence, which has played an important role in anchoring inflationary expectations. To argue in favour of fiscal and monetary expansion in the particular circumstances of the COVID-19 pandemic does not involve endorsing the full MMT approach to macroeconomic policy.

Suggested Citation

  • Graham Bird & Eric Pentecost & Thomas D. Willett, 2021. "Modern Monetary Theory and the Policy Response to COVID-19," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 22(1), pages 31-54, January.
    • Handle: RePEc:wej:wldecn:821
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    File URL: https://www.worldeconomics.com/Journal/Papers/Article.details?ID=821
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    Cited by:

    1. Richard C. K. Burdekin & Samuel Harrison, 2021. "Relative Stock Market Performance during the Coronavirus Pandemic: Virus vs. Policy Effects in 80 Countries," JRFM, MDPI, vol. 14(4), pages 1-18, April.

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