ECO1401 APPLICATION ESSAY #4 - INFLATION AND MODERN MONETARY THEORY

Discuss the history of inflation with a focus on the incidents of hyper-inflation that occurred in Weimar Germany in the 1920s and more recently in Venezuela. There is also a good example of high inflation in Brazil during the 1970s and 1980s that was managed effectively through regular monetary adjustments.

Since the Recession of 2008 central banks have become much more aggressive in manipulating the money supply in an effort to stimulate and maintain economic growth. They have used a new technique - Quantitative Easing - to lower long-term interest rates. More recently, some economists have advanced a new approach - Modern Monetary Theory - to guide the role of the bank in using money to meet the needs of a growing economy. These people include the Nobel Prize winning economist Paul Krugman who is a regular op-ed columnist and the newly elected and highly visible Congresswoman from New York, Alexandra Ocasio-Cortez. They feel that inflation is no longer a policy and that the government should decide to spend money on projects that are worthwhile regardless of the impact on the money supply. This is the basis behind Modern Monetary Theory, an idea of increasing appeal to the progressive wing of the Democratic Party. Explain the logic behind MMT and its potential value as a policy guideline. Think about the experience of Japan over the past twenty years and its lessons for monetary thinking.