The Case for Monetary Finance PDF
Preview The Case for Monetary Finance
1166TTHH JJAACCQQUUEESS PPOOLLAAKK AANNNNUUAALL RREESSEEAARRCCHH CCOONNFFEERREENNCCEE NNOOVVEEMMBBEERR 55––66,, 22001155 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 22 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 44 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 77 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 88
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