The two limits of modern monetary theory (MMT)

The economic policy implemented in OECD countries since the start of the COVID crisis closely resembles that recommended by modern monetary theory (MMT): fiscal deficits are set at the level deemed necessary by the government, and the central bank conducts a highly expansionary monetary policy (monetisation of fiscal deficits) to prevent interest rates from rising. Recent developments in OECD countries show the two limits of this policy: Normally, in modern monetary theory, when the economy reaches full employment, fiscal policy must be tightened to avoid inflation. But we have seen that this is difficult, because governments need to maintain high government spending and do not want to increase the tax burden; As long as modern monetary theory is applied, real interest rates are low or even negative, interest rates are lower than growth, and asset price bubbles develop before the economy returns to full employment. There is then no way to avoid these excessive asset price increases without abandoning the policy that corresponds to modern monetary theory before full employment is reached.