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The Impact of Fiscal Policy on Price Forecasts within the MMT Framework

The Impact of Fiscal Policy on Price Forecasts within the MMT Framework

Bitget-RWA2025/11/26 21:14
By:Bitget-RWA

- Modern Monetary Theory (MMT) challenges traditional fiscal constraints, arguing sovereign governments can spend freely as long as inflation is controlled. - It emphasizes fiscal-monetary coordination for goals like full employment, with job guarantee programs acting as anti-inflation buffers but facing scalability critiques. - Empirical validation remains contentious, as MMT models struggle to predict inflation accurately in high-capacity economies amid rising interest rates and global supply chain compl

Modern Monetary Theory (MMT) has gained traction as a bold approach to reexamining fiscal policy, especially as conventional limits on government expenditure are increasingly questioned in the context of fiat money and nontraditional monetary strategies. Fundamentally, MMT posits that nations controlling their own currency are not subject to the same financial constraints as individuals or businesses. The main limitation on government spending, according to MMT, is inflation rather than the necessity to balance budgets or increase taxes. This viewpoint has ignited significant controversy, particularly as leaders address the challenges of post-pandemic recovery, global instability, and widening economic disparities.

The MMT Framework: Integrating Fiscal and Monetary Policy

The essence of MMT lies in the seamless coordination of fiscal and monetary actions. The theory suggests that government expenditures are not directly "financed" by taxes or borrowing, but are instead instruments for achieving objectives such as full employment and stable prices.

and to give value to the currency by mandating its use for settling public obligations. and more about steering interest rates and managing liquidity for the central bank. This perspective stands in contrast to traditional fiscal thinking, which prioritizes maintaining balanced budgets throughout economic cycles.

The Impact of Fiscal Policy on Price Forecasts within the MMT Framework image 0

However, the effectiveness of this model relies heavily on close cooperation between fiscal and monetary policymakers.

indicated that synchronized fiscal and monetary strategies produce better growth results than isolated actions, especially during recessions. In the U.S., the Federal Reserve’s response to the pandemic—combining large-scale fiscal stimulus with Quantitative Easing (QE)—demonstrated how such policies can have varying effects across different sectors. While industries like FinTech thrived due to increased liquidity, others experienced inflation and asset bubbles .

Job Guarantee Programs and the Inflation Dilemma

Among MMT’s most debated ideas is the federal Job Guarantee (JG), which aims to secure full employment and act as a safeguard against inflation. By offering a minimum wage for unskilled work, the JG seeks to maintain steady demand and curb wage-driven inflation. Supporters believe this method balances the classic conflict between joblessness and inflation, as demonstrated by India’s MGNREGA initiative,

and enhanced infrastructure without causing major inflation spikes.

Nonetheless, skeptics question whether such programs can be scaled effectively or deliver meaningful productivity gains. They argue that merely expanding public employment does not necessarily boost the production of goods and services to match the increase in money supply.

observed that while these initiatives can be valuable in times of crisis, their long-term impact depends on aligning jobs with productive sectors. The U.S. Civilian Conservation Corps (CCC) from the 1930s serves as a historical example, and public works investments provided enduring advantages.

Empirical Hurdles: Does MMT Accurately Forecast Inflation?

There is ongoing debate over whether MMT’s models can reliably predict inflation. Detractors claim that MMT oversimplifies the intricate factors driving inflation, especially in advanced economies operating near full capacity.

concluded that MMT’s inflation models “do not fit the data,” failing to explain U.S. economic trends after 2020 as effectively as standard approaches. This criticism is heightened by the lagging nature of traditional inflation indicators like the CPI, —a pressing issue in the current economic climate.

Additionally, the fiscal consequences of monetary policy add complexity to MMT’s predictive power. For example, higher interest rates drive up government debt servicing costs, potentially fueling further inflation.

demonstrate how the redistributive effects of monetary policy interact with fiscal choices, complicating the identification of inflationary limits.

Risks and Realities in the Current Environment

The U.S. response to the pandemic illustrates both the promise and the challenges of policies inspired by MMT. The injection of $5 trillion in fiscal support prevented a deeper downturn but also led to a sharp rise in inflation, putting MMT’s inflation control mechanisms to the test. Proponents of MMT maintain that inflation is determined by resource constraints rather than fiscal deficits, but in practice, rapid increases in public spending can surpass the economy’s ability to adjust, particularly within global supply chains

.

These risks are compounded by international tensions and energy market disruptions, which can introduce inflationary pressures beyond the reach of domestic fiscal measures.

argues that while government spending on social and environmental priorities is not limited by tax revenue, effective safeguards are essential to prevent runaway inflation.

Conclusion: MMT as a Guiding Principle, Not a Cure-All

MMT presents a fresh perspective on fiscal management, prioritizing adaptability and public welfare over strict deficit reduction. However, its success depends on careful synchronization between fiscal and monetary authorities, as well as the use of tools like job guarantees and price controls to keep inflation in check. The evidence is mixed: while MMT’s institutional analysis is persuasive, its forecasting models often fall short in capturing the complexities of today’s economies, especially under conditions of high uncertainty.

For investors, the main lesson is that MMT-inspired strategies are not a universal solution but rather a framework that demands thoughtful implementation. The dangers of excessive inflation and asset bubbles are genuine, particularly in economies operating near full capacity. As policymakers steer through the post-pandemic era, the interaction between MMT’s theoretical foundations and practical limitations will play a crucial role in shaping future fiscal policy and global financial markets.

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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