Abstract
We give answers to questions 1 and 2, which are based on the discussions of the fiscal theory of the price level (FTPL) and the modern monetary theory (MMT). Specifically, from the perspective of economics of payments by Freeman (1996), we present a model consistent with the FTPL assertion that fiscal and monetary policy are intertwined. This mechanism explains the process by which the central bank underwrites government bonds, which are the source of fiscal spending, thereby increasing the money stock and consequently affecting prices. In addition, the MMT proposition “budget deficits are national wealth” is established between the public sector and the private sector from the assumptions, (i) the government activity in which revenue is financed after spending decision is made and (ii) government bonds and the monetary base are treated identically.
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Notes
- 1.
Milton Friedman (1953).
- 2.
In Japan, M1, M2, M3, and L (liquidity in a broad sense) are published as indices of the money stock. Here, we will proceed with the discussion with the narrow sense of M1 in mind. See Bank of Japan (2021).
- 3.
The debate over private cryptocurrencies will be ignored in these arguments.
- 4.
Sims (2013) did not introduce S(TAB) in his arguments. This assumption is set here to be consistent with the MMT discussion described below.
- 5.
Assembling the process described in Fig. 5.3 in the order of Step 4, Step 1, Step 2, and Step 3, the structure of government spending is TAB(S). This is the behavior of households whose revenues are budgeted ahead of expenditure, as presented by Kelton (2020). Nevertheless, the reason for adopting S(TAB) here is that we assume central banks can underwrite government bonds indefinitely.
- 6.
In ex-post, the case of Sect. 5.3 is in the same situation as case of Sect. 5.2. Since MMT assumes that the monetary base and government bonds are identical, the proposition of MMT holds true even if the transfer of wealth from the government sector to the private sector is the monetary base or government bonds.
References
Bank of Japan. Research and Statistic Department. Guide to Japan’s Money Stock Statistics. May 2021.
Diamond. Douglas W. and Philip H. Dybvig. 1983. “Bank runs, deposit insurance, and liquidity,” Journal of Political Economy, Vol. 91, 401–419.
Freeman, Scott. 1996. “The payment system, liquidity, and rediscounting, “ American Economic Review, Vol. 86, 1126–38.
Friedman, 1953. Essays in Positive Economics. University of Chicago Press.
Kelton, Stephanie. The Deficit Myth Modern Monetary Theory and the Birth of the People’s Economy, Public Affairs. 2020.
Kiyotaki, Nobuhiro and Randall Wright. 1989. “On money as a medium of exchange.” Journal of Political Economy, Vol. 97, 927–54.
Sims, A. Christopher. 2013. Paper Money. American Economic Review.103(2): 563–584.
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Sakai, Y. (2024). Answers to Questions 1 and 2: Financial System from Viewpoint of Payment. In: Deflation and Fiscal Deficits. SpringerBriefs in Economics. Springer, Singapore. https://doi.org/10.1007/978-981-97-0415-6_5
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