The International Monetary Fund's chief economist cautioned against what she called the "free lunch" thinking surrounding modern monetary theory, an economic framework gaining traction among some economists and policymakers who see it as a guide to greatly expanding government spending.
"We believe that there is a very important role for fiscal policy in macro-civilization, for redistribution, for equity considerations, so fiscal policy is a very important part of the toolkit for policymakers," Gita Gopinath told reporters during an April 9 news conference at the IMF's meeting in Washington, D.C.
"That said, there is no free lunch," Gopinath said. "There are limits to how much countries can spend using money financing to finance fiscal deficits."
Modern monetary theory, or MMT, holds that countries that issue debt in their own currencies cannot default, so governments can print money to fund whatever programs are desired and then, in the short term, adjust taxes to stave off any inflation.
Adherents of the theory tend to downplay the role of central banks in maintaining stability and have leveled critiques at central banks for not acknowledging asset bubbles until they have popped and caused damage.
Gopinath countered April 9 that effective central banking is crucial to maintaining economic stability. "It is history that has taught us the value of central banking dependence to maintain stable economies, and we think that's an important lesson to keep in mind," she said.
Gopinath's comments come as Wall Street economists have started looking more closely at MMT. Goldman Sachs Group Chief Economist Jan Hatzius wrote in a research note April 8 that MMT proponents make some "correct and important" points, including the idea that countries like the U.S. and Japan cannot default on their debt as long as they keep printing money.
Despite being named by some as an example of implementing modern monetary theory, Japanese policymakers have labeled MMT as a threat to fiscal discipline.
"It's an extreme idea and very dangerous because it would weaken fiscal discipline," Japanese Finance Minister Taro Aso said earlier in April, according to a Reuters report. "I have no intention of making Japan a platform for experimenting [with] such ideas."