Then there is the experience of Japan, which used monetary policy for decades to fund deficits and did not end up financially unstable as conventional wisdom might have predicted. And you can add to that a particular interpretation of the post-World War II "even keel" approach to fiscal-monetary policy coordination in advanced countries, which is seen by MMT proponents as having underpinned an extraordinary period of recovery and prosperity.

2. The MMT debate has planted the seeds of both deeper insights and analytical excesses.

The debate has merit in stimulating greater discussion of whether the global economy's changed structural parameters, including a permanently lower "r-star," or natural rate of interest, allows governments to run larger economically sustainable deficits than was previously thought possible. (Additional structural influences include the dis-inflationary effects of technological innovations and demographic changes.) It comes at a time of concerns about a declining global growth rate, shrinking potential, and a deep inequality trifecta (of income, wealth and opportunity).

The main risk - those "analytical excesses" that I worry about - is that MMT proponents may go too far in building a secular case for fiscal priorities to dictate monetary policy and for printing money to enable ever growing government deficits. More generally, this would also erode central bank autonomy and undermine confidence in the policymaking process, especially during periods of economic/financial volatility and uncertainty.

3. Several themes are likely to play out as the debate intensifies.

One of the biggest risks is that the MMT debate will result in a polarisation of views that diverts attention away from what is both feasible and desirable in the middle. One example that could win bipartisan support on Capitol Hill might be a program to modernise infrastructure, funded through a combination of cost-effective financing and public-private partnerships. The increasingly-polarizing debate in economics and politics, including both across traditional economic wings and within the ranks of progressive economists, could make such concrete action increasingly difficult.

Complicating the picture is that all this is occurring at a time when the Federal Reserve has initiated a review of its policy framework and tools. This widens the scope for rendering the Fed more vulnerable to political interference.


We are also likely to hear more and more about "fairness" from the MMT camp.

Given that experimental central bank policies have already been used to save the financial system, repress financial volatility, boost asset prices and de facto favour the wealthy who own financial assets, why not experiment further in order to target more broadly and more directly the well being of society?

Mohamed A. El-Erian is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO.

Bloomberg