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If on a particular day, the government spends more than it taxes, reserves have been added to the banking system see vertical transactions. This will typically lead to a system-wide surplus of reserves, with competition between banks seeking to lend their excess reserves forcing the short-term interest rate down to the support rate or alternately, to zero if a support rate is not in place.
At this point banks will simply keep their reserve surplus with their central bank and earn the support rate. The alternate case is where the government receives more taxes on a particular day than it spends. In this case, there may be a system-wide deficit of reserves. As a result, surplus funds will be in demand on the interbank market, and thus the short-term interest rate will rise towards the discount rate.
Thus, if the central bank wants to maintain a target interest rate somewhere between the support rate and the discount rate, it must manage the liquidity in the system to ensure that there is the correct amount of reserves in the banking system. Central banks manage this by downloading and selling government bonds on the open market.
On a day where there are excess reserves in the banking system, the central bank sells bonds and therefore removes reserves from the banking system, as private individuals pay for the bonds. On a day where there are not enough reserves in the system, the central bank downloads government bonds from the private sector, and therefore adds reserves to the banking system.
It is important to note that the central bank downloads bonds by simply creating money—it is not financed in any way. If a central bank is to maintain a target interest rate, then it must necessarily download and sell government bonds on the open market in order to maintain the correct amount of reserves in the system. Proponents of MMT claim that it provides a better framework for understanding quantitative easing QE than the traditional textbook money multiplier model.
Paul Sheard argues that, when the central bank downloads government debt securities as opposed to private sector risk assets, QE is best viewed as a debt refinancing operation of the consolidated government.
Sheard argues that QE can be seen as the third stage in this process, turning the government debt securities back into reserves. The unwinding of QE just reverses this yet again. MMT economists describe any transactions within the private sector as "horizontal" transactions, including the expansion of the broad money supply through the extension of credit by banks.
MMT economists regard the concept of the money multiplier , where a bank is completely constrained in lending through the deposits it holds and its capital requirement, as misleading. According to MMT, bank credit should be regarded as a "leverage" of the monetary base and should not be regarded as increasing the net financial assets held by an economy: MMT proponents such as Warren Mosler argue that trade deficits need not be unsustainable and are beneficial to the standard of living in the short run.
Exports, on the other hand, are an economic cost to the exporting nation because it is losing real goods that it could have consumed. Cheap imports may also cause the failure of local firms providing similar goods at higher prices, and hence unemployment but MMT commentators label that consideration as a subjective value-based one, rather than an economic-based one: MMT argues that as long as there is a demand for the issuer's currency, whether the bond holder is foreign or not, governments can never be insolvent when the debt obligations are in their own currency; this is because the government is not constrained in creating its own currency although the bond holder may affect the exchange rate by converting to local currency.
MMT does agree with mainstream economics, that debt denominated in a foreign currency certainly is a fiscal risk to governments, since the indebted government cannot create foreign currency. In this case the only way the government can sustainably repay its foreign debt is to ensure that its currency is continually and highly demanded by foreigners over the period that it wishes to repay the debt — an exchange rate collapse would potentially multiply the debt many times over asymptotically, making it impossible to repay.
In that case, the government can default, or attempt to shift to an export-led strategy or raise interest rates to attract foreign investment in the currency. Either one has a negative effect on the economy. Economist John T. Harvey explained several of the premises of MMT and their policy implications in March MMT claims that the word "borrowing" is a misnomer when it comes to a sovereign government's fiscal operations, because what the government is doing is accepting back its own IOUs , and nobody can borrow back their own debt instruments.
In this theory, sovereign government is not financially constrained in its ability to spend; it is argued that the government can afford to download anything that is for sale in currency that it issues there may be political constraints, like a debt ceiling law. The only constraint is that excessive spending by any sector of the economy whether households, firms, or public could cause inflationary pressures.
MMT economists advocate a government-funded job guarantee scheme to eliminate involuntary unemployment. Proponents argue that this can be consistent with price stability as it targets unemployment directly rather than attempting to increase private sector job creation indirectly through a much larger economic stimulus, and maintains a "buffer stock" of labor that can readily switch to the private sector when jobs become available. A job guarantee program could also be considered an automatic stabilizer to the economy, expanding when private sector activity cools down and shrinking in size when private sector activity heats up.
MMT can be compared and contrasted with mainstream Keynesian economics in a variety of ways: A survey of leading economists showed a unanimous rejection of assertions attributed to modern monetary theory in the survey: Black said "MMT scholars do not make or support either claim".
The post-Keynesian economist Thomas Palley argues that MMT is largely a restatement of elementary Keynesian economics , but prone to "over-simplistic analysis" and understating the risks of its policy implications. He argues that these insights are well captured by standard Keynesian stock-flow consistent IS-LM models , and have been well understood by Keynesian economists for decades.
He also criticizes MMT for essentially assuming away the problem of fiscal - monetary conflict. He also argues that MMT lacks a plausible theory of inflation , particularly in the context of full employment in the employer of last resort policy first proposed by Hyman Minsky and advocated by Bill Mitchell and other MMT theorists; of a lack of appreciation of the financial instability that could be caused by permanently zero interest rates; and of overstating the importance of government created money.
Palley concludes that MMT provides no new insights about monetary theory, while making unsubstantiated claims about macroeconomic policy, and that MMT has only received attention recently due to it being a "policy polemic for depressed times". Marc Lavoie argues that whilst the neochartalist argument is "essentially correct", many of its counter-intuitive claims depend on a "confusing" and "fictitious" consolidation of government and central banking operations.
New Keynesian economist and Nobel laureate Paul Krugman argues that MMT goes too far in its support for government budget deficits and ignores the inflationary implications of maintaining budget deficits when the economy is growing.
The chartalist view of money itself, and the MMT emphasis on the importance of taxes in driving money is also a source of criticism. From Wikipedia, the free encyclopedia. This article needs additional citations for verification.
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Unsourced material may be challenged and removed. Find sources: This article possibly contains original research. Please improve it by verifying the claims made and adding inline citations. Statements consisting only of original research should be removed. January Learn how and when to remove this template message. Percent change in U. Further information: Sectoral balances. Monetary circuit theory. Randall Wray, "Modern Money Theory Randall January , "Modern Money Theory: Political Economy Research Institute , pp.
The Banking Law Journal. A Treatise on Money , , pp. May The American Economic Review.
The Economist. Retrieved Horizontalists and Verticalists: Sense or Nonsense? Why does government issue bonds? Randall Wray: Sovereign government really can't borrow, because what it is doing is accepting back its own IOUs. If you have given your IOU to your neighbour because you borrowed some sugar, could you borrow it back? No, you can't borrow back your own IOUs". Business Insider. Ludwig von Mises Institute.
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