SA’s monetary policy mandate is flexible and symmetric, allowing active support to the economy, writes Chris Loewald
SA's fiscal and monetary policies are being tested by the lockdown-induced economic contraction and concerns of a deeper depression that could follow it. Some argue that if we pursued modern monetary theory ; if negative nominal interest rates were in place; if the government spent much more, preferably inclusive of saved pension funds; and all of the government’s debt issuance was bought by the central bank, the economic crisis would be averted.
While neither fiscal nor monetary authorities can stop the economic contraction, policymakers have taken consistent steps to prevent depression. Policy responses to the pandemic do not take steps to reduce the money supply or even cut spending. Nor do they strive to keep the rand or other currencies at a constant value to gold . Each of those were mistakes made by policymakers that turned the 1929 financial crisis into the Great Depression.
However, assuming households and firms are keen to restart the economy, these proposals are more likely to return us to the entrenched stagflation — lower growth and higher inflation — that normally bedevils the economy. The debate over MMT tells us why this is the case. We might paraphrase that debate this way:, it will cause inflation.
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