Night View 21.10.2021


Do the major world economies tend to follow the Modern Monetary Policy?

Part 3 : The  State and the Financial sector under MMT

Previously, we see the question of international trade and Exchange rates. We see the particular vision of the Trade.  This context also highlights the question of the relations between State and the Financial Sector especially the Debt issuance.

The Financial system and State under MMT

Generally speaking, the MMT see the financial system as an exchange of currency between Central Bank currents accounts of State and Commercial Banks. When State spends money, its operational current accounts to CB is debited to be put into a private current account generally managed by commercial banking network. In this case the total deposits of the commercial banks in their Centra Banks current account will also increase. At the opposite, Taxation (State earnings) is the reverse operations. The Central Banks current account of State is credited by removing a certain amount of money from Commercial Banks accounts.

By the way the State could affect the interbank lending market and so control the reserves requirement of Banks and then the interest rate level.

Considering that at the day t, the State spend more money than it receives from taxes. This move creates a net reserves injection in the banking system. The surplus of cash generating by State spending compete the reserves surplus of some Commercial Banks proposed at the discount rate in the market. In this case, Commercial Banks in reserves deficit will catch the surplus and Banks in surplus will keep it on central banks currents accounts. The Interest Rate are then push down to the support rate if there exist or to 0%.

At the opposite, it at day t, State receives more taxes than it spends. In this case, there is a deficit of reserves in the system and then the surplus funds of some Commercial Banks will become in demand by Banks in deficit to fit requirements regulation.  In this case, the Interest rate will increase toward the discount rate.

Consequently, Central Banks could control Interest Rate level thanks Open Markets Operations of Buy/Sell Treasury Bonds in case of reserves surplus/deficit.

Under the MMT the best interest rate level is then 0% because State should control the interbank market and then choose to maintain the economic wealth  in reserves or in Government Bonds according to situation. MMT argues that High Interest can generate inflationist pressures as two channels exist: the interest rate revenues and futures prices.


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