This morning, a former deputy governor of Australia’s central bank (RBA) published a short Op Ed in the Australian Financial Review (July 16, 2019) – Why there are no free lunches from the RBA – which served as a veiled critique of Modern Monetary Theory (MMT). The problem is that the substantive analysis supported the core of the MMT literature that we have developed over 25 years, refuted the standard macroeconomics textbook treatment of the link between the government and non-government sectors, and, incorrectly depicted what MMT is about – all in one short article. Not a bad effort I thought. But disappointing that a person with such experience and knowledge resorts to perpetuating such crude representations of ‘cost’ and myths about government finances....
Bill doesn't mention two important factors relating to interest rate setting (policy rate) and excess reserves.
The first point is that the government paying more interest to the private sector leads to an increase in the spendable money supply as the rate increase is reflected along the yield curve. This is an expansionary influence which offsets the increase in the cost of borrowing as interest rates in general rise to reflect the increase in the policy rate.
The second point is that reserves are affect banks' leverage ratio, so that a consequence of an increase in reserves is decreased lending to stay within the bounds of the ratio, as Mike Norman and Matt Franko have observed. In fact, Mike uses the affect of changes in the level of reserves leverage ratio heavily in the analysis in his newsletter. This effect is opposite to that most people in finance and economics assume. The futility of Japan's increasing payment system balances in stimulating the economy shows this. It has the opposite effect.
Perhaps this level of detail exceeds the scope of the Bill's post, but both are important from an MMT perspective.
Bill Mitchell – billy blog
Paying interest on excess reserves is not constrained by scarcity
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
Has these events out of sequence:
ReplyDelete"It is clear that in response to the GFC, ..... the Federal Reserve in the US,... – followed suit "
the policy of Reserve Asset increase always leads credit flow reduction ... Reserve Assets are in the denominator...
Bill goes too far when he says "MMT economists were the first in the modern era to point out that loans create deposits not the other way around. You will never find that proposition in the standard macroeconomics textbooks."
ReplyDeleteAny number of economists made that point a hundred and more years ago, e.g. Josiah Stamp, governor of the Bank of England in the 1920s. And David Hume, writing around 300 years ago, made that point.
Plus its a well established bit of money / banking folklore that goldsmith bankers in London around 300 years ago took to lending out receipts for non-existent gold: i.e. they were into money printing.