4 Pages Posted: 27 Dec 2010
Date Written: November 20, 2009
This post considers whether a given deficit resulting in more reserves in circulation and fewer bonds held by the non-government sector raises the likelihood of spiraling inflation, as most interpretations of the government budget constraint (GBC) assume. The approach here recognizes the importance of understanding the balance sheet implications of both of these options that are central to MMT. While most economists typically assume a supply and demand relationship, as in the hypothesized loanable funds market, and then build models accordingly, such an approach can miss important relationships in the real world. In particular, any transaction in a capitalist economy results in changes in the agents’ financial statements; if the hypothesized supply and demand relations are not consistent with the actual changes occurring within the financial statements of the relevant agents, then the hypothesized model is irrelevant. In a modern money regime such as ours in which there is a sovereign currency issuer operating under flexible exchange rates, “monetization” versus “financing” as characterized both in the GBC and in the hypothesized loanable funds market fall into this category.
Keywords: Government Deficits, Monetary Operations, Reserves
JEL Classification: E40, E41
Suggested Citation: Suggested Citation