Governments issue currency through a variety of mechanisms, such as by paying interest on debt with newly-issued currency. Modern monetary theory (MMT) suggests nations can fund some or all deficit spending by issuing currency, notably when experiencing a recessionary GDP gap.
A new currency dividend allows the Federal Reserve to call for new currency issued by the Treasury into the American Citizen’s Dividend—perhaps 1⁄5 to 1⁄2 the regular payment—for immediate distribution. This encourages employment when facing a recessionary GDP gap, and increases inflation as the gap closes.
By responding to data with currency issue, the Fed can directly address liquidity crises by increasing consumer spending, mainly through consumers with the least income and thus highest marginal propensity to consume. This delays the need for interest rate cuts.
A new currency dividend is a more flexible tool than deficit spending and interest rate adjustments. Currency issued into consumer hands has a similar effect to increases in credit card purchases or expenditure from savings, but without increasing debt or decreasing savings.
Overall, an ill-timed new currency dividend may mildly increase inflation, creating higher prices and wages, to which minimum wage policy then adjusts. Long-run aggregate supply settles with no impact on real wages or prices. Even an ill-timed dividend sends some of this new currency to lower-income communities, causing reorganization of labor to absorb some of the effect as economic growth instead of inflation.
The Fed would still manage its target funds rate and use open market operations to manage the money supply and cool an economy exceeding its long-term sustainable GDP. It can even use a combination of increased interest rates to reduce inflation with a new currency dividend to stimulating employment and GDP growth in low-income communities.
Together, these tools would allow the Fed to better achieve its mission of stable inflation and low unemployment.