Lars P. Syll — MMT– the key insights

Lars quotes Knut Wicksell and William ("Bill") Vickery.

Lars P. Syll’s Blog
MMT — the key insights
Lars P. Syll | Professor, Malmo University

Bill Mitchell — Paying interest on excess reserves is not constrained by scarcity

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 hits another one out of the park. This post is a concise summary of key MMT principles.

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