Rather than controlling the quantity of reserves, central banks

today typically implement monetary policy by setting the

price of reserves — that is, interest rates.

Mmt evaluates the inflation risk

The idea behind such a sweeping and universal program, in the context of MMT, is to ensure full
employment no matter what policies the government is adopting to fight inflation.

Committing to a zero interest rate policy permanently, for

instance, would be a dramatic move by the Fed, effectively a
repudiation of its statutory commitments to ensure price
stability and full employment. Indeed, it’s unimaginable to me
that that could happen without an act of Congress repealing
those statutory obligations and mandating a zero rate.

Similarly, a US decision to stop issuing Treasury bonds would

disrupt a key part of the international financial system, where
US government bonds are used as a go-to risk-free asset to
which other bond interest rates are linked. That feels similarly
inconceivable

The good news therefore is that large countries are quite capable of
compensating for the coronavirus-induced loss of revenue for companies,
workers and the self-employed by means of comprehensive direct transfers,
without any financial restrictions. If it is not possible to finance the additional
government debt via private investors on the capital market, central banks are
prepared to buy government bonds, in principle without limit. The US Federal
Reserve and the European Central Bank expressly confirmed this on March
15th and March 18th respectively.

Traditional economists regard this type of thinking as highly

inflationary and damaging to free markets. If the government is
printing as much money as it takes to buy up all the unemployed
labour, then the private sector will be starved of workers. Employees
will be pulled out of productive, efficient, market-driven companies
into inefficient government jobs. Wage inflation will spiral as the
government's new money pours in and workers demand higher pay in
the private sector.
The idea of increasing taxes as a deflationary measure is probably one
of the most controversial aspects of MMT.
MMTers respond that they also oppose fine-tuning and instead
want to use automatic stabilizers—including the jobs guarantee
—to keep the economy on track.
.
Nevertheless, implicit in MMT’s support regarding the need for deficit spending to reduce unemployment
is that private sector entrepreneurs and households will accept any additional money government creates
and spends to employ resources owned by the private sector, even if no additional taxes are levied.
MMT argues that the government can create jobs merely by spending more money, which government creates
without increasing taxes, i.e., by deficit spending.

The political dangers of MMT

Political activist and media interest in MMT comes at a time of new found political confidence among
progressive Democrats, as reflected in the scale and ambition of the proposed policy programs. After forty
years of neoliberal dominance of social and economic policy, that scale and ambition is welcome.
However, there is a grave political danger progressive Democrats may embrace MMT’s claims that those
programs can be had for free by printing money.
Doing so risks splashing the progressive project as economically implausible even before it has gotten off the
ground. Even if that pitfall is avoided, MMT’s financing recommendations will inevitably place the progressive
project on the horns of a dilemma. If followed, the outcome will be significantly higher inflation and massive
budget deficits, the combination of which would also likely trigger a new financial crisis. Alternatively, avoiding that
outcome would require huge tax increases and fee impositions that would leave progressives politically vulnerable,
both to charges of policy mendacity and to voter backlash against surprise forced tax increases.

The issue of the Phillips curve trade-off is central to macroeconomics and policy.