The Case for Monetary Finance

19 Pages·2015·2.44 MB·English

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The Case for Monetary Finance – An Essentially
Political Issue

Adair Turner
Institute for New Economic Thinking

Paper presented at the 16th Jacques Polak Annual Research Conference
Hosted by the International Monetary Fund
Washington, DC─November 5–6, 2015

The views expressed in this paper are those of the author(s) only, and the presence
of them, or of links to them, on the IMF website does not imply that the IMF, its
Executive Board, or its management endorses or shares the views expressed in the
paper.
The Case for Money Finance: an
essentially political issue
Sixteenth Jacques Polak Research Conference
International Monetary Fund
5 November 2015
Adair Turner
Chairman
Institute for New Economic Thinking
300 Park Avenue South -5thFloor, New York, NY 10010
22 Park Street, W1J 2JB London, UK
0
Technical feasibility Political risks
VS
Desirability of monetary finance The risk that political dynamics
if we could assume that make it impossible for
governments/central banks governments/central banks to
could make credible make commitments which
commitments only to use it in
• They will actually stick to
appropriate amounts in
appropriate circumstances • Are credible in advance
1
Monetary finance: increased fiscal deficit
financed by permanent money creation
Change in consolidated
Central bank directly credits
Option 1
public sector balance sheet
government current account
A L
Non-interest
Government issues interest-
bearing
Option 2
bearing debt, which CB
irredeemable
purchases and converts to
money
non-interest bearing
irredeemable “due from
government”
Government issues interest-
Option 3
bearing debt, which CB
purchases and perpetually
rolls over
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Fiscal and monetary implications of
alternative stimulus policies
Impact on:
Current year Public debt stock Monetary base
fiscal deficit
Money financed Permanent
deficit Increase NIL increase
Debt financed
deficits Increase Increase NIL
Quantitative Easing NIL NIL Temporary
increase
Debt-financed
deficits plus Temporary
Quantitative Easing Increase Increase increase
33
Four propositions
1 There exist circumstances in which √ ?
appropriate to stimulate aggregate nominal
demand
Monetary finance will always stimulate √√√
2
aggregate nominal demand
In some circumstances it will do so more
3 √√
certainly and with less adverse side effects
than available alternative policies
√√
The degree of stimulus can be controlled
4
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Policy tools and effects: the
‘Independence’ Hypothesis
Money financed
deficits Prices
Aggregate
Debt financed
Nominal
deficits
Demand
Real output
Ultra loose
monetary policy
Independence Hypothesis:
Division of increase in nominal demand between prices and real output
is independent of the choice of policy tool used to stimulate nominal
demand.
5
Proposition 2: Money finance will always
stimulate nominal demand
A direct fiscal stimulus – but with no danger of Ricardian
Equivalence offset
An increase in household nominal net worth
An asymmetric effect on private and public balance sheets
 Household gross nominal wealth increase
 No increase in NPV of public sector liabilities
66
Proposition 2: Money finance will always
stimulate nominal demand
A direct fiscal stimulus – but with no
 Inadequate demand,
danger of Ricardian Equivalence offset
deflation, low-flation are
policy choices and never
An increase in household nominal net
worth unavoidable effects
An asymmetric effect on private and
public balance sheets  Faced with inadequate
nominal demand
 Household gross nominal
wealth increase governments/central banks
never run out of
 No increase in NPV of public
sector liabilities ammunition
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Proposition 3: Monetary finance vs alternative
policy options: impact on nominal demand
• Same first round fiscal
≥
effect
Money financed
Debt financed
deficits
deficits • No possible Ricardian
Equivalence offset
Forward
More Ability to change
Money financed
guidance to
certain expectations through
deficits
than influence current words or actions is
expectations uncertain
More
Money financed Quantitative
certain Given uncertain/indirect
deficits Easing
transmission channels
than
Less
Sustained Given potential harmful
adverse
Money financed
negative effects of excessive private
side effects
deficits
than interest rates leverage growth
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