The missing piece of modern monetary theory

Modern monetary theory (MMT) posits that: Governments can at any time implement the fiscal deficit needed to achieve full employment; This fiscal deficit must be financed by money creation to avoid a crowding-out effect (a rise in interest rates reducing household and corporate demand); The money creation can be prevented from giving rise to inflation if this policy is stopped once the economy returns to full employment. We note that OECD countries are applying modern monetary theory today, although in a slightly different context: the fall in production in 2020 does not result from a fall in demand but from the lockdown of workers; the purpose of the fiscal deficits is not to restore full employment but to prevent income losses among households and companies. But modern monetary theory has a missing piece: in contemporary economies, money creation no longer leads to inflation in goods and services prices but to inflation in asset prices. This requires an explanation not how to prevent inflation, but how to prevent inflation in asset prices. We suggest an addition to modern monetary theory: asset price inflation c ould be prevented by active macroprudential policies (regulatory balance sheet ratios for financial intermediaries, loan-to-value ratios, taxation of short-term capital gains).