Table Of ContentModern Monetary Theory and
European Macroeconomics
This book provides a new methodological approach to money and macro-
economics. Realising that the abstract equilibrium models lacked descriptions of
fundamental issues of a modern monetary economy, the focus of this book lies
on the (stylised) balance sheets of the main actors. Money, after all, is born on
the balance sheets of the central bank or commercial bank. While households
and firms hold accounts at banks with deposits, banks hold an account at the
central bank, where deposits are called reserves. The book aims to explain how
the two monetary circuits – central bank deposits and bank deposits – are inter-
twined. It is also shown how government spending injects money into the
economy.
Modern Monetary Theory and European Macroeconomics covers both the
general case and then the Eurozone specifically. A very simple macroeconomic
model follows, which explains the major accounting identities of macro-
economics. Using this new methodology, the Eurozone crisis is examined from a
fresh perspective. It turns out that not government debt but the stagnation of
private sector debt was the major economic problem and that cuts in government
spending worsened the economic situation. The concluding chapters discuss
what a solution to the current problems of the Eurozone must look like, with
scenarios that examine a future with and without a euro.
This book provides a detailed balance- sheet view of monetary and fiscal oper-
ations, with a focus on the Eurozone economy. Students, policy- makers and fin-
ancial market actors will learn to assess the institutional processes that underpin
a modern monetary economy, in times of boom and in times of bust.
Dirk H. Ehnts works as a lecturer in Economics at Bard College, Berlin.
Routledge International Studies in Money and Banking
For a full list of titles in this series, please visit www.routledge.com/series/SE0403
78 Monetary Policy in Theory and 84 Money, Valuation and Growth
Practice Conceptualizations and
Facing the internal vs external contradictions of the money
stability dilemma economy
Nicolas Barbaroux Hasse Ekstedt
79 New Contributions to Monetary 85 European Banking Union
Analysis Prospects and challenges
The foundations of an alternative Edited by Juan E. Castañeda,
economic paradigm David G. Mayes and
Edited by Faruk Ülgen (with the Geoffrey Wood
collaboration of Matthieu
Méaulle, Rémi Stellian and 86 Wages, Bonuses and
Ramón Tortajada) Appropriation of Profit in the
Financial Industry
80 Money and Its Origins
The working rich
Shahzavar Karimzadi
Olivier Godechot
81 Cultures of Expertise in Global
87 Banking and Monetary Policies
Currency Markets
in a Changing Financial
Leon Wansleben
Environment
82 The Global Financial Crisis and A regulatory approach
the New Monetary Consensus Wassim Shahin and
Marc Pilkington Elias El- Achkar
83 A New Measure of Competition 88 Modern Monetary Theory and
in the Financial Industry European Macroeconomics
The performance–conduct– Dirk H. Ehnts
structure indicator
Edited by Jacob A. Bikker and
Michiel van Leuvensteijn
Modern Monetary Theory and
European Macroeconomics
Dirk H. Ehnts
First published 2017
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2017 Dirk H. Ehnts
The right of Dirk H. Ehnts to be identified as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record for this book has been requested
ISBN: 978-1-138-65477-8 (hbk)
ISBN: 978-1-315-62303-0 (ebk)
Typeset in Times New Roman
by Wearset Ltd, Boldon, Tyne and Wear
For Josephine and her generation
Contents
List of figures ix
List of boxes x
List of tables xi
Preface xii
Acknowledgements xiv
Introduction 1
PART I
Theoretical foundations 13
1 Substance and purposes of economic activity 15
PART II
Money and credit 39
2 Debts and balance sheets 41
3 The creation of bank deposits 58
4 The creation of central bank deposits 77
5 The instruments of a central bank 90
6 The creation of sovereign securities 102
7 The sustainability of the financial system 127
8 Inflation and deflation 135
viii Contents
PART III
Analysis 147
9 A macroeconomic model 149
10 Europe before the euro 164
11 The situation with the euro 168
PART IV
Reform 187
12 How do we restore demand? 189
13 The future: with or without the euro? 193
Conclusion 202
Further reading 204
Index 206
Figures
3.1 Simple monetary circuit 66
3.2 The monetary pyramid 75
4.1 Rates of change of US monetary aggregates M1, M2, M3 82
4.2 Rate of change of US consumer price index 83
5.1 Interest rates in the Eurozone 91
11.1 Marginal lending, main refinancing and deposit rates, in
per cent 168
11.2 Domestic credit to the private sector, in percentage of GDP 169
11.3 Eurostat house price indices, 2010 = 100 170
11.4 Gross fixed capital formation, € per inhabitant 171
11.5 Share of construction in total value added, in per cent 172
11.6 Gross domestic product at market prices, indexed
(1999 = 100) 173
11.7 Unemployment, in per cent 174
11.8 Change in consumer price indices, in per cent 174
11.9 External balance of goods and services, as a percentage
of GDP 175
11.10 Nominal unit labour cost, 2005 = 100 177
11.11 Government surplus/deficit as a percentage of GDP 178
11.12 Euro exchange rate to the US dollar, in US dollars 179
11.13 Secondary market yields of government bonds with
maturities of close to ten years, period averages in
percentage per year 180
11.14 TARGET2 balances, in millions of euro 182
