MODERN MONETARY THEORY. Australian inflation data defies mainstream macro predictions, again – Bill Mitchell.

Even though inflation has been benign now for some quarters, the market economists, banks, still think it is about to accelerate and the RBA will be hiking interest rates.

But the reality is quite the opposite.

One of the on-going myths that mainstream (New Keynesian) economists propagate is that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions.

Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success.

Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The evidence supports the Modern Monetary Theory (MMT) preference for fiscal policy over monetary policy.

. . . Professor Bill Mitchell

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