For three decades, central banks promised us they would take care of the economy. Fiscal policy, we were told, was toothless. Monetary policy would ensure prosperity.
But central banks have failed to deliver the prosperity they promised. And in an astonishing reversal, they are now calling for fiscal authorities to take the strain.
Monetary policy is all about raising aggregate demand. The idea is that if people have more money, they will spend more on goods and services, and that will encourage businesses to invest more, produce more, employ more, and pay more, setting up a “virtuous circle” of rising employment and growing wages leading to higher consumption spending and more production. There is a danger, of course, that the “virtuous circle” will turn into a damaging inflationary spiral, but central banks have inflation targets, and tools to manage inflation…
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