Table Of ContentModern Monetary Theory and Practice:
An Introductory Text
William Mitchell, L. Randall Wray and Martin Watts
© William Mitchell, L. Randall Wray and Martin Watts, 2016
First published in 2016,
Centre of Full Employment and Equity (CofFEE)
The University of Newcastle
Callaghan, NSW 2308, Australia
First Printed by CreateSpace 2016
An Amazon company
www.createspace.com
Table of Contents
Chapter 1: Introduction
1.1 What Is Economics? Two Views
1.2 What is Macroeconomics?
1.3 Macro and the Public Purpose
Appendix: Advanced Material
Chapter 2: How to Think and Do Macroeconomics
2.1 Introduction
2.2 Thinking in a Macroeconomic Way
2.3 What Should a Macroeconomic Theory be Able to Explain?
Appendix
Chapter 3: A Brief Overview of Economic History and the Rise of Capitalism
3.1 Introduction
3.2 An Introduction to Monetary Capitalism
3.3 Tribal Society
3.4 Slavery
3.5 Feudalism
3.6 Revolts and the Transition to Capitalism
3.7 Capitalism
3.8 Monetary Capitalism
3.9 Global Capitalism
3.10 Economic Systems of the Future?
Chapter 4: The System of National Income and Product Accounts
4.1 Measuring National Output
4.2 Components of GDP
4.3 Equivalence of Three Measures of GDP
4.4 GDP versus GNP
4.5 Measuring Gross National Income
4.6 GDP Growth and The Price Deflator
4.7 Measuring CPI inflation
4.8 Measuring National Inequality
Appendix: Advanced Material
Chapter 5: Sectoral Accounting and the Flow of Funds
5.1 Introduction
5.2 The Sectoral Balances View of the National Accounts
5.3 Revisiting Stocks and Flows
5.4 Integrating NIPA, Stocks, Flows and the Flow of Funds Accounts
5.5 Balance Sheets
5.6 The Flow of Funds Matrix
Appendix
Chapter 6: Introduction to Sovereign Currency: The Government and its Money
6.1 Introduction
6.2 The National Currency (Unit of Account)
6.3 Floating versus Fixed Exchange Rate Regimes
6.4 IOUs Denominated in National Currency: Government and Non-Government
6.5 Use of the Term ‘Money’: Confusion and Precision
Chapter 7: The Real Expenditure Model
7.1 Introduction
7.2 Aggregate Supply
7.3 Aggregate Demand
7.4 Private Consumption Expenditure
7.5 Private Investment
7.6 Government Spending
7.7 Net Exports
7.8 Total Aggregate Expenditure
7.9 Equilibrium National Income
7.10 The Expenditure Multiplier
Chapter 8: Introduction to Aggregate Supply
8.1 Introduction
8.2 Some Introductory Concepts
8.3 Price Determination
8.4 The General Aggregate Supply Function
8.5 Some Properties of the General Aggregate Supply Function (AS)
8.6 Factors Affecting Aggregate Output per Hour
Chapter 9: Labour Market Concepts and Measurement
9.1 Introduction
9.2 Measurement
9.3 Categories of Unemployment
9.4 Broad Measures of Labour Underutilisation
9.5 Flow Measures of Unemployment
9.6 Duration of Unemployment
9.7 Hysteresis
Appendix: Advanced Material
Chapter 10: Money and Banking
10.1 Introduction
10.2 Some Definitions
10.3 Financial Assets
10.4 What do Banks Do?
Appendix: Advanced Material
Chapter 11: Unemployment and Inflation
11.1 Introduction
11.2 What is Inflation?
11.3 The Quantity Theory of Money
11.4 The Phillips Curve
11.5 The Accelerationist Hypothesis and the Expectations-Augmented Phillips Curve
11.6 Hysteresis and the Phillips Curve Trade-Off
11.7 Underemployment and the Phillips Curve
11.8 Demand-Pull and Cost-Push Inflation
11.9 The Conflict Theory of Inflation
11.10 Raw Material Price Increases
11.11 Cost-Push and Demand-Pull Inflation Summary
11.12 Incomes Policies
Appendix: Advanced Material
Chapter 12: Full Employment Policy
12.1 Introduction
12.2 Full Employment as a Policy Goal
12.3 Unemployment Buffer Stocks and Price Stability
12.4 Employment Buffer Stocks and Price Stability
12.5 Alternative Policies for Promotion of Employment
Appendix: Advanced Material
Chapter 13: Introduction to Monetary and Fiscal Policy Operations
13.1 Introduction
13.2 The Central Bank
13.3 The Treasury
13.4 Coordination of Monetary and Fiscal Operations
13.5 Taxes and Sovereign Spending
13.6 Currency Sovereignty and Policy Independence
Appendix: Advanced Material
Chapter 14: Fiscal Policy in Sovereign Nations
14.1 Introduction
14.2 Functional Finance versus Sound Finance
14.3 Fiscal Policy Debates: Crowding Out and (Hyper)Inflation
14.4 The Debt Sustainability Debate
14.5 Conclusion: MMT and Fiscal Policy
Chapter 15: Monetary Policy in Sovereign Nations
15.1 Introduction
15.2 Modern Banking Operations
15.3 Interest Rate Targets versus Monetary Targets
15.4 Liquidity Management
15.5 Implementation of Monetary Policy
15.6 Unconventional Forms of Monetary Policy
15.7 Monetary Policy in Practice
15.8 The Advantages and Disadvantages of Monetary Policy
15.9 Central Bank Independence
15.10 Horizontal and Vertical Operations: An Integration
Chapter 16: Policy in an Open Economy: Exchange Rates, Balance of Payments and
Competitiveness
16.1 Introduction
16.2 The Balance of Payments
16.3 Essential Concepts
16.4 Aggregate Demand and the External Sector – Revisited
16.5 Trade in Goods and Services, Product Market Equilibrium and the Trade Balance
16.6 Currency Crises
16.7 Capital Controls
Appendix: Advanced Material
Appendix: Methods, Tools and Techniques
A.1 Overview
A.2 Basic Rules of Algebra
A.3 A Simple Macroeconomic Model
A.4 Graphical Depiction of a Macroeconomic Model
A.5 Power Series Algebra and The Expenditure Multiplier
A.6 Index Numbers
A.7 Annual Average Growth Rates
A.8 Textbook Policy Regarding Formalism
Table of Tables
Number Heading
Table 2.1 Average annual real GDP growth by decades, per cent
Table 2.2 Average unemployment rates by decade, per cent
Table 4.1 Items in Australian CPI, September 2013
Table 4.2 Hypothetical data for basket of goods and services
Table 4.3 Gini coefficients for several OECD nations, 2004 and 2012
Table 7.1 Consumption ratios, OECD nations, 2005-2010, per cent
Table 7.2 Expenditure chain volume measures in national accounts (Australia)
Table 7.3 The expenditure multiplier process
Table 7.4 Simulating changes in the multiplier components
Table 9.1 OECD underemployment, per cent of labour force, 1990 to 2014
Table 9.2 Labour market flows matrix
Table 9.3 Gross flows in the US labour market, December 2015–January 2016, millions
Table 9.4 Total inflow and outflow from labour force states, US, December 2015 to January
2016, millions
Table 9.5 Labour market state transition probabilities, US, December 2015 to January 2016
Table 15.1 Target interbank rates for developed economies
Table 16.1 Australian balance of payments, various years, current prices
Table 16.2 Comparison of international prices
Table A.1 Employment in Australia, 2000-12, thousands
Table A.2 Employment indices for Australia, 2000-12
Table A.3 Compound growth rate calculations
Table of Figures
Number Heading
Figure 2.1 Comparative unemployment rates, per cent, 1960 to 2015
Figure 2.2 Real wage and productivity indexes, Australia, 1971 to 2015, March 1982=100
Figure 2.3 Household debt to disposable income ratio, Australia, per cent, 1998 to 2015
Figure 2.4 US Federal Reserve Bank monetary base, 1959 to 2015, US dollar millions
Figure 2.5 Government fiscal balance as % of GDP, Japan, 1980 to 2015
Figure 2.6 Gross and net public debt as % of GDP, Japan, 1980 to 2015
Figure 2.7 Japan overnight interest rate, per cent, July 1985 to December 2015
Figure 2.8 Japan government 10-year government bond yield, per cent, 1990 to 2015
Figure 2.9 Inflation and deflation in Japan, per cent, 1980 to 2015
Figure 4.1 The Lorenz curve
Figure 5.1 UK sectoral balances, 1960 to 2014
Figure 5.2 A stylised sectoral balance sheet
Figure 5.3 A uses-and-sources-of-funds statement
Figure 5.4 A complete sector uses-and-sources-of-funds statement
Figure 5.5 A stylised three sector flow-of-funds matrix
Figure 5.6 A graphical sectoral balances framework
Figure 5.6a Deriving the private domestic sector balances
Figure 5.6b Private domestic surpluses and deficits
Figure 5.7 Sustainable space for sovereign governments
Figure 5.8 Sustainable space for governments constrained by fiscal rules
Figure 6.1 The Minsky – Foley pyramid
Figure 7.1 Aggregate supply
Figure 7.2 The consumption function
Figure 7.3 The aggregate demand function
Figure 7.4 An increase in the intercept of the aggregate demand function
Figure 7.5 Changing slope of the aggregate demand function
Figure 7.6 Planned expenditure and equilibrium income
Figure 7.7 The multiplier process
Figure 7.8 Impact of a change in government spending on equilibrium expenditure and
income
Figure 7.9 Impact of a change in the marginal propensity to consume on equilibrium
expenditure and income
Figure 8.1 The employment-output function
Figure 8.2 Output, sales and national income
Figure 8.3 The general aggregate supply function (AS)
Figure 8.4 US manufacturing output per person employed
Figure 8.5 US manufacturing output per hour of all persons
Figure 9.1 The labour force framework
Figure 9.2 Labour force participation rate and annual real GDP growth – Australia, 1980 to
2015, per cent
Figure 9.3 Unemployment rate and average duration of unemployment (weeks), US,
February 2008 to October 2012
Figure 10.1 US Treasury yield curve (February 3, 2016)
Figure 10.2 A typical bank balance sheet
Figures 10.3, 10.4, 10.5, 10.7, 10.9 & 10.11
Bank A balance sheets
Figures 10.6, 10.10 & 10.12
Bank B balance sheet
Figures 10.8 & 10.13
Central bank balance sheet
Figure 11.1 Velocity of M2 money stock (M2V), US, 1950-2012
Figure 11.2 The basic Phillips curve
Figure 11.3 The unemployment-inflation choice set
Figure 11.4 The shifting US Phillips curve - 1948-2012
Figure 11.5 The expectations-augmented long-run Phillips curve
Figure 11.6 Annual Australian unemployment rate, Treasury and OECD NAIRU estimates,
1960-2015
Figure 11.7 Inflation and unemployment, Australia, quarterly data, 1978-2015
Figure 11.8 Inflation and unemployment and underemployment, Australia, quarterly data,
1978-2013
Figure 11.9 Short- and long-run Phillips curves
Figure 12.1 The sacrifice ratio and disinflation episode
Figure 12.2 Sacrifice ratios with persistence and hysteresis
Figure 12.3 The Job Guarantee and the Phillips curve
