Fiscal Policy and the Inflation Constraint

Modern monetary theory (MMT) makes clear that, for currency-issuing governments, the macroeconomic constraint on fiscal policy is resource availability, not revenue. This is sometimes summarized as “the constraint on fiscal policy is inflation” in recognition of the link between resource availability and the macro impacts of spending. So long as there are available workers, materials, plant and equipment, it is possible to produce more. Under these circumstances, extra spending on goods and services can initiate or encourage production without necessarily affecting prices. Although this point is elementary, recent public debate suggests that it is not obvious to everyone. Some appear to believe that inflation will result whenever there is: (i) money creation; (ii) spending; or (iii) fiscal deficits. These concerns are addressed in turn.

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