Modern Monetary Theory — Neo-Chartalism
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MMT on Interest Rates
Abstract: Financial innovations have reduced banks’ reserve holdings. Some argue the Fed’s ability to set interest rates might be compromised. This concerns arises from a misunderstanding of Fed operations. Regardless of the quantity of reserve balances, the Fed can always set its federal funds rate target. The quantity of reserve balances or the relative size of the Fed’s operations are also unrelated to its influence on interest rates. That banks must settle their customers’ tax liabilities using reserve balances is sufficient for the Fed’s interest rate target to influence other interest rates.
Spending Precedes Taxation
Abstract: This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.