Public Debt – Balloon or Anchor? A Macroeconomic Case Study of Canada’s Fiscal and Monetary Policy Response to COVID-19

Abstract

New perspectives have emerged during the COVID-19 era on a longstanding dilemma regarding the best path to managing public debt. Two main schools of thought are evident in available literature: those that believe that a government must maintain fiscal responsibility by eventually reducing its debt levels through austerity measures; and those that believe, based on newer progressive economic theory, that large public debt is not only acceptable, but that government debt is crucial to a productive society. This article explores the case of Canada by reviewing the measures enacted in an attempt to mitigate the shock to the economy, and exploring the potential pros and cons of the two distinct policy options. It is proposed in this article, that the tenets of Modern Monetary Theory (MMT) should be considered as an innovative approach to ensuring appropriate use of available resources.