No free lunch from Modern Monetary Theory, says IMF's Gita Gopinath
1 min read . Updated: 09 Apr 2019, 10:48 PM IST
Premium- Fiscal policy a very important part of tool kit for the policymakers, says IMF chief economist Gita Gopinath, stepping into the MMT debate
- MMT has found backing in US Democrat Alexandria Ocasio-Cortez, who is pushing for more spending on climate change and providing guaranteed healthcare
Washington: The International Monetary Fund’s (IMF's) chief economist has a message for the disciples of modern monetary theory: don’t expect a free lunch.
“Fiscal policy is a very important part of the tool kit for policymakers," Gita Gopinath told reporters at a press conference Tuesday in Washington, following the IMF’s release of its global economic outlook. “That said, there is no free lunch. There are limits to how much countries can spend."
Gopinath is the latest big-name economist to weigh in on the theory known as MMT, which is seeking to shift the debate on those limits. It says countries that have their own central banks and borrow in their own currencies—like the US and Japan—can’t go broke, and so don’t need to worry about overspending so long as it’s not generating high inflation.
The doctrine has gained a following within the progressive wing of the US Democratic Party, and has been backed by first-term Representative Alexandria Ocasio-Cortez of New York, who is one of several lawmakers pushing for more spending to combat climate change and provide guaranteed healthcare.
Heavyweights from Wall Street and academia have attacked the Modern Monetary Theory, with Lawrence Summers calling it “fallacious at multiple levels" and BlackRock Inc. CEO Larry Fink dismissing it as “garbage".
At the same time, many economists—including Summers and Olivier Blanchard, one of Gopinath’s predecessors at IMF—have been questioning the view that growing public deficits and debt pose an immediate threat. The IMF itself, long associated with support for tight budgets especially in borrower countries, has shown signs of a shift—acknowledging that fiscal austerity in Europe ended up hurting the economy.
The MMT debate has surfaced amid concern over how developed countries will respond in the event of an economic downturn, and whether fiscal policy will have to take the lead since central banks have limited room to cut interest rates.
Gopinath said many countries have tried using “money financing" to bankroll budget deficits. “The experience suggests that usually ends up with uncontrolled inflation with a collapse in investment, with a collapse in growth," she said.
Gopinath, 47, took over as the IMF’s chief economist in January. She was previously an economics professor at Harvard University, and is considered an expert in monetary and fiscal policy.
