Wednesday, January 15, 2020

The Monetary Monopoly Model — Brian Romanchuk

What I refer to as the Monetary Monopoly Model is the simplest possible mathematical model that captures basic concepts from Modern Monetary Theory (MMT). Despite its simplicity, it gives a good feeling of how a sovereign could pin down the value of a brand new currency (relative to existing currencies, or the value of real goods or services). However, the model makes almost no assumptions about private sector behaviour, and such assumptions would be needed to simulate an existing industrial capitalist society. The reason to start with this model is that the discussion of those behavioural assumptions will drown out the MMT-specific parts of the model.
The model is based on the model presented by Pavlina R. Tcherneva, in "Monopoly Money: The State as a Price Setter."* Tcherneva's discussion follows earlier texts on the imposition of money in European colonies, by other authors; I chose this article solely because it had a convenient mathematical exposition within the article. Readers that are interested in the academic precedents for these concepts are invited to consult the citations in Tcherneva's article. The model presented here uses my preferred notation, but cannot be considered to be an original model.

For readers who are allergic to equations, feel free to jump ahead to the sub-section "Interpretation in a Fictional Country." An intuitive example of how this model works is given therein.…
Bond Economics
The Monetary Monopoly Model
Brian Romanchuk

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