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Neo-classical and Modern Monetary Theory – a balance sheet view by Dirk Ehnts Berlin School of Economics and Law this version: April 5th, 2012.

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Presentation on theme: "Neo-classical and Modern Monetary Theory – a balance sheet view by Dirk Ehnts Berlin School of Economics and Law this version: April 5th, 2012."— Presentation transcript:

1 Neo-classical and Modern Monetary Theory – a balance sheet view by Dirk Ehnts Berlin School of Economics and Law this version: April 5th, 2012

2 Balance sheet economics by Dirk Ehnts Introduction What is this about? - understand the creation of money - understand how money and other financial assets are transferred and what implications this does have How does it work? - a balance sheet perspective is chosen together with double- entry bookkeeping, inspired by Lavoie (2011) and conversa- tions with the author in the same year

3 A balance sheet: assetsInstitutionliabilities money100equity100 bonds300external debt800 stocks500 baseline scenario: government with (independent) central bank, domestic currency, big country Balance sheet economics by Dirk Ehnts

4 More balance sheets: assets banksliabilities assets governmentliabilities assetscentral bankliabilities assets householdsliabilities assets external sectorliabilities Balance sheet economics by Dirk Ehnts

5 Interdependent balance sheets, cleared through assets from higher level: How is money created in this financial web? central bank banks external sector householdscorporate sector Balance sheet economics by Dirk Ehnts

6 GOVERNMENT (Treasury and Central Bank): Buys goods and services, gold, and assets; makes transfer payments GOVERNMENT (Treasury and Central Bank): Buys goods and services, gold, and assets; makes transfer payments HOUSEHOLDS Taxes (Treasury Coin, Federal Reserve Notes, Bank Reserves) HOUSEHOLDS Taxes (Treasury Coin, Federal Reserve Notes, Bank Reserves) PRIVATE SECTOR (High Powered Money) PRIVATE SECTOR (High Powered Money) $ FIAT MONEY $ (Treasury Coin, Federal Reserve Notes, Bank Reserves) $ HOARDS $ Credit Activity (Bank money, commercial paper, private bonds) $ Source: Wray (1998, p.112) Inside & Outside Money Balance sheet economics by Dirk Ehnts

7 The Old Monetary Theory View (I) assetscentral bankliabilities assets banksliabilities increase in outside money (M) through helicopter drop of money (no inside money!) CB controls money supply! (reserve ratios?) assets100 money100 money200 money100 savings200 money 50 money150 money100 assets150 loan from CB 50 loans to banks 50 Balance sheet economics by Dirk Ehnts

8 The Old Monetary Theory View (II) assetscentral bankliabilities assets banksliabilities increase in government spending (G) does only affect asset composition (portfolio) of banks (crowding out) bonds500 money100 bonds200 money100 savings900 stocks500 bonds300 equity200 stocks400 money200 bonds600 money100 bonds100 money200 Balance sheet economics by Dirk Ehnts

9 The Modern Monetary Theory View (Ia): assetsgovernmentliabilities assetscentral bankliabilities assets banksliabilities assetshouseholdsliabilities bonds100 money100 money 90 money 10 savings 90 deposits 90 loans 90 loans (net) 0 Balance sheet economics by Dirk Ehnts

10 money 90money 80money 40 money 10 The Modern Monetary Theory View (Ib): assetscentral bankliabilities assets banksliabilities increase in government spending (G) bonds100 money100 savings 90 deposits 90 loans 90 bonds 70 money 10 reserves 10 bonds 30 loans120 deposits120 bonds100 bonds 0 (2nd round reserves after giving additional loans of 30 omitted) money 40 Balance sheet economics by Dirk Ehnts

11 The Modern Monetary Theory View (II): assetscentral bankliabilities assetsbanksliabilities increase in inside money (M) bonds100 money100 savings 90 equity 10 loans 100 bonds 80 money 10 reserves 10 money 10 deposits 100loans 110 deposits 110 money 9 reserves 11 money 11 reserves 11 Balance sheet economics by Dirk Ehnts

12 The Modern Monetary Theory View (III): assetscentral bankliabilities assets banksliabilities increase in outside money (M, not G) bonds100 money100 savings 90 equity 10 loans 100 bonds 80 money 10 reserves 10 money 10 deposits 100 money120 money 30 bonds 60 bonds120 Balance sheet economics by Dirk Ehnts

13 A comparison: money views old (IS/LM) and new (MMT): old new government spendingloans create deposits displaces other assets 1:1 no crowding out per se bonds are sold or taxgovernment spends, no financing income received beforeby public needed, CB can monetize gov spendingpublic debt (taxes, bonds: Δliquidity) monetary policy viamonetary policy via interest rate, control of money supplychanges in liquidity CB controls money supply defensive operations to supply (via reserves/multiplier)demanded reserves at target rate Balance sheet economics by Dirk Ehnts

14 Literature Lavoie, Marc. 2011. The monetary and fiscal nexus of neo-chartalism: A friendly critical look. Wray, Randall. 1998. Understanding Modern Money:The Key to Full Employment and Price Stability. Aldershot and Lyme, NH: Edward Elgar Balance sheet economics by Dirk Ehnts


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