Question

Modern monetary theorists are sceptical about the potential for quantitative easing to contribute significantly to economic recovery in economies which have been subject to a global pandemic and call instead for more reliance on fiscal policy. Explain their reasoning, with reference to the sectoral balances model.

Answer 1

Economists believe quantitative easing is not effective as transmission of rate cuts are not easily passed and can lead to shortage of liquidity.

Moreover reliance on fiscal policy helps reduced taxes and higher government spending on different sectord to alleviates recession and make structural reforms along with automatic stabilizers.

This leads to government budgets deficits however for non governments sectors it causes budget surplus based on sectoral balance model and thus private sector can now spend on capital expenditure and hiring which boosts aggregate demand and real GDP as whole making it efficient.

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