I have a new Econlib article, which will appear in two parts. It summarizes the results of my research on MMT.
Note that this sentence in Part 1 has a typo:
“In Singapore, both the interest rate and the exchange rate are endogenous.”
It should have been interest rates and the money supply are endogenous. It might be corrected by the time you read the article.
Thanks to commenter Garrett for pointing that out.
READER COMMENTS
Lawrence D'Anna
Feb 1 2021 at 4:37pm
I have a question.
You say
How is this affected by the fed paying interest on reserves?
I mean specifically, if there’s a bond that pays X% interest, and the fed is paying X% interest on reserves, is there really a difference between the government issuing that bond and the government issuing new reserves?
It seems to me that as far as the public is concerned those assets are almost identical. They’re both government backed assets with a short maturity date that pay the same interest rate.
There are a few things that you can do with money that you couldn’t do with the bonds, like pay your taxes, but if you need to do that aren’t there plenty of people what would be happy to swap their bonds for your money for a small feee?
What so special about money as compared to any other government backed security with a very short maturity and paying similar interest? Isn’t money just one end of the interest rate and maturity spectrum, rather than being this like, ontologically different kind of thing?
Is it fair to say “fiscal policy” decides the size of the government’s total balance sheet, and “monetary policy” decides the structure of it, in particular it decides how many assets will be issued at the short end of the maturity spectrum? Or do I have it all wrong?
Scott Sumner
Feb 3 2021 at 12:04pm
If you pay interest on reserves then money creation no longer finances the fiscal deficit. Interest bearing reserves are merely another form of government debt.
MMTers claim that even without IOR there’s no difference between money and bond financed deficits. That’s false; zero interest cash is not a close substitute for T-bills paying 5% interest.
Jerry Brown
Feb 3 2021 at 2:42pm
“Interest bearing reserves are merely another form of government debt.”
I agree with that. But it also means you recognize that the central bank paying IOR is really an arm of the government- which is what MMT says.
Scott Sumner
Feb 4 2021 at 5:13pm
AFAIK, everyone knows the Fed is a part of the government in a fiscal sense; all its profits go to the Treasury. Its “independence” is in terms of setting monetary policy.
Thomas Hutcheson
Feb 2 2021 at 5:32am
Did you see Krugman’s putdown of MMT on the Ezra Klein interview?
Scott Sumner
Feb 3 2021 at 11:53am
Thomas, No, do you have a link?
Ben Yeoh
Feb 11 2021 at 2:46pm
Here’s the link
https://www.nytimes.com/2021/01/29/opinion/ezra-klein-podcast-paul-krugman.html
though you may have seen it already – for other readers if interested
Andrew_FL
Feb 2 2021 at 3:14pm
Cutting the deficit was “reckless”, really? Your political spectrum must narrower than a one lane street if “deficits and money printing are good, and complementary” and “deficits and money printing are good, and substitutes” are “opposite extremes”
Scott Sumner
Feb 3 2021 at 11:55am
Andrew, I never said cutting the deficit was reckless. You are attacking views I do not hold.
Tristan Sinha
Feb 2 2021 at 6:18pm
MWW (p. 464): “The fact that the money supply is endogenously determined means that the LM schedule will be horizontal at the policy interest rate. All shifts in the interest rates are thus set by the central bank and funds are supplied elastically at that rate in response to the demand. In this case, shifts in the IS curve would not impact on interest rates.” Is this necessarily wrong though? When I think about ISLM I picture a horizontal LM curve at the policy rate that intersects a downward sloping IS curve, and a vertical LRAS curve that intersects the IS curve to determine the natural rate of interest and output. To the extent that a rate targeting CB wants to reach full employment/hit an inflation target it will have to adjust its policy rate so as to have the horizontal LM curve shift to intersect the IS and LRAS curve (aka set r=r*). All practical problems of actually being able to do that aside, are you suggesting that the LM curve is vertical? Or are you merely saying that although the LM curve is horizontal at the policy rate, the CB has to often adjust the policy rate to hit an inflation target?
Scott Sumner
Feb 3 2021 at 12:00pm
I don’t find the IS/LM model to be at all useful. But if you insist on using the model, then you need to account for the fact that a shift in the IS curve will lead to a shift in the LM curve, and vice versa. The interest rate is partly endogenous if the central bank tries to control inflation, which it does.
It makes zero sense for MMTers to argue that money is endogenous if you target interest rates, and then ignore that interest rates are endogenous if you target inflation.
I’d add that it’s an empirical fact that IS shocks impact interest rates, so why deny that fact?
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