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Central Banks are playing a crucial role in the economic response to the Coronavirus pandemic. The scale of their intervention would have been considered “unbelievable” few months ago. In the US the size of the balance sheet of the Federal reserve increased from $4.3 trillion in mid-March 2020 to a peak of nearly $7.2 trillion in early June (Report on the Federal Reserve’s Balance Sheet, August 2020). Can we consider this a “de facto” direct funding of the emergency measures deployed by the governments? No doubt the post-pandemic world will be very different from the one we knew.

This paper is written with Matteo Deleidi and has been published in the Levy Institute Working Papers Series. It is focused on the Modern Monetary Theory (MMT)’s treatment of inflation from an open economy perspective. It analyses how the inflation process is explained within the MMT framework and provides empirical evidence in support of this vision. However, it also makes use of a Stock-Flow Consistent (open economy) model to underline some limits of the theory when it is applied in the context of a non-US (relatively) open economy with a flexible exchange rate regime. The model challenges the contention made by MMTers that measures such as the Job Guarantee program can achieve full employment without facing an inflation-unemployment trade-off.

Link to the paper