New Economic Perspectives

Adding the Foreign Sector

By Eric Tymoigne and L. Randall Wray

(Revised Figure 8 on 12/6/13)

[Part I] [Part II] [Part III] [Part IV] [Part V] [Part VI]

Paul Davidson has recently written:

What is Bitcoin?  According to Modern Money Theory, bitcoin can not be money since it is not accepted in payment of taxes by any government — nor is it issued by any government via the governed purchase of goods and/or services from the private sector.  So what is bitcoin in terms of MMT?  I do not know what MMT  proponents would respond to this query?

Similarly, Tom Palley argues that government currency is demanded for reasons other than paying taxes and that foreigners who may want to hold the domestic (foreign to them) currency do not pay taxes to the domestic government. In addition, he says, in some countries the domestic private sector does not want to use the domestic government currency in many, or even most, economic transactions even though the government is imposing a tax; thus taxes do not drive currency. 

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Adding the Central Bank

By Eric Tymoigne and L. Randall Wray

[Part I] [Part II] [Part III] [Part IV] [Part V] [Part VI]

Beyond the inflationary aspect of MMT, Palley (2013) argues that MMT does not account for the flooding of reserves in the economic system that results from a monetary financing of government spending. In this case, a deficit leads to a decline in interest rates and potential financial instability.

Fiebiger (2012a, 2013) argues that Treasury operations do not lead to a change in the level of central bank liabilities and so there is no monetary creation, and that it is disingenuous to exclude the Treasury General Account at the Fed (TGA) from the money supply. He also wonders why the Treasury continues to issues bonds when the fed funds rate (FFR) is effectively zero today, if, following MMT, bond offerings are voluntary operations used to drain excess reserves.

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