The Two Approaches to Money: Debt, Central Banks, and Functional Finance

Levy Economics Institute, Working Paper No. 855, 2015

40 Pages Posted: 9 Dec 2015

See all articles by Lorenzo Esposito

Lorenzo Esposito

Bank of Italy

Giuseppe Mastromatteo

Catholic University of the Sacred Heart of Milan

Multiple version iconThere are 2 versions of this paper

Date Written: November 2015

Abstract

The scientific reassessment of the economic role of the state after the crisis has brought back Abba Lerner’s theory of functional finance (FF). A thorough discussion of this concept is helpful in reconsidering the debate on the nature of money, the origin of the business cycle, and crises. It also allows a reevaluation of many policy issues, such as the Barro-Ricardo equivalence, the cause of inflation, and the role of monetary policy.

FF, throwing a different light on these issues, can provide a sound foundation for discussing income, fiscal, and monetary policy rules in the right context of flexibility in the management of national budgets, assessing what kind of policies should be awarded priority and the effectiveness of tackling the crisis with the different part of public budget. It also allows us to understand ways of increasing efficiency through public investment while reducing the total operational costs of firms. In the specific context of the eurozone, FF is useful for assessing the institutional framework of the euro and how to improve it in the face of protracted low growth, deflation, and weak public finances.

Keywords: Crisis, Functional Finance, Debt, Growth, Sustainability of Public Finance, Central Bank Independence

JEL Classification: B22, E62, E63

Suggested Citation

Esposito, Lorenzo and Mastromatteo, Giuseppe, The Two Approaches to Money: Debt, Central Banks, and Functional Finance (November 2015). Levy Economics Institute, Working Paper No. 855, 2015, Available at SSRN: https://ssrn.com/abstract=2701195 or http://dx.doi.org/10.2139/ssrn.2701195

Lorenzo Esposito (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giuseppe Mastromatteo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

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