MMT's Economic Toolkit For Addressing Inflation and Economic Constraints
Back in April, I missed publishing a post that should have appeared between Navigating Challenges: Inflation and Economic Constraints and the Conclusion. I left out MMT's Economic Toolkit for you to review. So here it is.
As our exploration of Modern Monetary Theory (MMT) continues, we delve deeper into the toolkit that MMT provides for addressing economic challenges, particularly inflation. While MMT has sparked significant debate with its views on macroeconomic policy, it also offers a range of policy tools and strategies to manage the complex dynamics of the economy.
Modern Monetary Theory's Economic Toolkit
MMT provides a non-exhaustive yet comprehensive list of policy tools that can be used to address potential inflation and other economic challenges. These tools include:
Direct quantitative credit regulation: Regulating the amount of credit provided to non-financial corporations, controlling the expansion of credit, and ensuring responsible lending practices.
Qualitative credit regulations: Regulations focused on the quality of non-financial business lending, ensuring that the composition of bank balance sheets is modulated responsibly.
Winding down or breaking up non-bank subsidiaries: Gradually phasing out commercial bank credit provided to non-commercial bank financial institutions and breaking up or winding down non-bank subsidiaries of bank holding companies.
Liquidity regulations on non-financial corporations: Imposing liquidity requirements on non-financial corporations to encourage savings and promote financial stability.
Domestic bank license for foreign entities: Requiring foreign entities to acquire a domestic bank license to engage in domestic lending, ensuring better control and regulation of foreign sources of credit.
Regulating the issuance of securities by non-financial corporations: Restricting new issuances of equity or debt securities to domestic purchasers, controlling foreign sources of credit without overly disrupting cross-border financial transactions.
Federal chartering of non-financial corporations: Creating a federal chartering system for non-financial corporations with specific requirements, such as compliance with credit regulation and liquidity, reserve, and capital requirements.
Expand the Central Bank’s collateral schedule and discount window: Expanding the collateral schedule of the central bank and allowing non-bank entities access to central bank borrowing to ensure financial stability.
Reform the Parliamentary Budget Office (PBO): The PBO's focus should be shifted from solely narrow budgetary outcomes to impacts on inequality, greenhouse gas emissions, and other environmental indicators.
Strategic Targeted Government Spending to Reduce Inflation by Building Capacity: MMT proposes that strategic government spending in areas like renewable energy, healthcare, education, and housing can reduce inflation instead of fuelling it.
Competition policy and law: This could involve breaking up large corporations, preventing mergers that would reduce competition, or regulating industries with a history of anti-competitive behaviour.
Strategic Reallocation of Non-Productive Resources for Price Stability: Once the target sectors are identified, policymakers should design policies and programs that facilitate the reallocation of resources from less productive areas to more productive sectors.
Taxation adjustments: Implementing changes to the tax system to influence economic behaviour and manage inflation.
Parking the Overnight Interest Rate: Setting the overnight interest rate at a level likely to be between 0% and 3% and maintaining it there as the desired inflation rate.
New and additional automatic stabilisers: Implementing more robust automatic stabilisers, such as a job guarantee program.
This non-exhaustive list offers a variety of policy tools and approaches that could be used to manage different types of inflation, such as demand-pull or cost-push inflation, and address their underlying causes.
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