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Can Taxes and Bonds Finance Government Spending?

Levy Economics Institute Working Paper No. 244

28 Pages Posted: 14 Aug 1998  

Stephanie Bell

University of Missouri at Kansas City - Economics

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.

JEL Classification: H61, H63

Suggested Citation

Bell, Stephanie, Can Taxes and Bonds Finance Government Spending?. Levy Economics Institute Working Paper No. 244. Available at SSRN: https://ssrn.com/abstract=115128 or http://dx.doi.org/10.2139/ssrn.115128

Stephanie A. Bell (Contact Author)

University of Missouri at Kansas City - Economics ( email )

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