Debt and Deficits—A Modern Monetary Theory Perspective

Abstract

AbstractCOVID‐19 has triggered the most severe economic crisis since the 1930s. The resulting policy shift is diametric to what mainstream macroeconomists have been advocating for decades. We argue that their framework underestimates the fiscal space available to governments and cannot provide an understanding of the consequences of these policy extremes. We introduce modern monetary theory (MMT), which disabuses us of the claims that deficits and debt are to be avoided. MMT defines fiscal space in functional terms, in relation to available real resources that can be brought back into productive use, rather than focusing on irrelevant questions of government insolvency.