The Policy Response to COVID-19: The Implementation of Modern Monetary Theory

The COVID-19 induced recession are forcing central banks to adopt tools advocated by Modern Monetary Theory, financing their efforts to stabilize their economies with keystrokes. The keystrokes create claims, enabling governments to purchase assets and finance deficits in their attempts to stabilize their economies. COVID-19 reminds us that markets are not alert to threats: foreign, domestic, or microbial. Creating the rules and policies to provide people with needed goods and services falls to government, a role that government has only partly fulfilled. The tepid response also reflects a misapprehension of the possibilities of monetary and fiscal policies. There are two dimensions of the market economy, both related, both highlighted by the current pandemic. The first is the institutional basis of the market economy revealed in the promises we make to each other in the form of financial assets. The second is the dependence of people on employment for their livelihood. The inability to earn an income creates insecurity. It also impairs the ability of people to keep their promises. The move to fiat currency in 1971 ended the dollar’s link to gold, expanding the possibilities of both monetary and fiscal policy to mitigate the effects of the pandemic.