Abstract
To shore up their economies and alleviate unnecessary suffering, governments across the world borrowed and spent trillions of dollars during the Covid-19 pandemic. This unprecedented borrowing from central banks not only reignited debates on the importance of government fiscal policy but also the fear of government deficits and inflation. This chapter examines the historical reasons why governments are forced to borrow should they want to spend more than they take in in taxes, fines and fees. It then explores Modern Monetary Theory (MMT) and empirically defuses some of the main arguments made by its detractors. Though somewhat sympathetic to MMT, the chapter argues that MMT suffers from at least two problems: it has no cogent explanation for an aggregate demand problem in the economy. Secondly, its focus on fiscal policy misses that most modern money is created by commercial banks.
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