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Friday, March 27, 2015

Theme: Government Financial Operations

Modern Monetary Theory (MMT) emphasises the importance of monetary operations within modern economies. They explain the difference between Greece and Japan, a distinction that some find hard to make. This article provides a limited overview, and a set of links to some of my related articles on this topic.

Please note that this is a "living document", and links will be filled in as the articles appear. This post is meant to be a navigational aid. (I am publishing it now to offer an explanation to regular readers why a number of long articles on operations will be appearing on this site.)

What Is Modern Monetary Theory?

I have another "theme article" that discusses MMT here.  It provides a set of links on this topic. One of my earlier articles, What Is A Government Bond? covers government finance from a basic high level view that is common within a lot of the MMT writings seen on the internet. The articles listed in the sections below provide is a more detailed look at this topic.

Why Operations Matter?

There are a number of perennial topics of discussion that come up which are related to operations. Where does the money for government deficit spending come from? Does government bond issuance raise interest rates? What is the central bank up to? Can the government be forced to default by "the markets"?

  • Why Operations Matter. [To do.]

The Euro Area And Sovereign Default Risk

Recent events have made it clear that the government bonds in the euro area are not default risk free, My argument is that small changes in the procedures of euro area operations would lead to a system that would in fact be default risk free; the current drift towards breakup has been the result of political decisions. And if we grant the argument that the euro area is only a small set of procedural changes away from being default risk free, then by contrast, countries that are deemed default risk free may only be a small set of badly designed procedures away from default. Therefore, a fixed income analyst needs to take these operational issues seriously.

  • What Is The Difference Between Greece And [Japan/United States/Canada]?* [To do.]

Detailed Analysis Of Operations

A Note To Regular Readers

These articles (like many on this site) represent first drafts of text that will later moved into longer documents that I will publish. Previously, I have been interweaving multiple threads of research together in order to create a variety of topics on this site. This was meant to act as a form of market research. However, I want to finish a chapter on operations relatively quickly, and so I now expect to put out a slug of articles on that topic.

I am not publishing with an academic audience in mind, although I realise that academics are reading my articles. I expect that I may add some citations to the literature in footnotes as the larger publications are ready to go out the door. As a bleg, I would be happy to incorporate suggested references. This particularly matters for the current set of articles. I read the MMT literature years ago, and so I have absorbed the world view, but I have lost track of particular sources to cite. (I am happy to post links to internet articles as well, but those links break over time and are less useful in printed documents, so my preference is for references to journals or books.)


* The trigger for writing this sequence of articles was precisely this question: why is Greece different than the United States? I realised I could not properly address that until the basics of government operations were covered first.

(c) Brian Romanchuk 2015


  1. I like your work, finding it well thought out and written in an understandable fashion. I welcome the opportunity of commenting step-by-step as a comprehensive macro-economic structure is described.

    Might I be so bold as to offer a word of advice?

    Build on simple, undeniable concepts. Make sure that each of the undeniable concepts blends into one-another.

    An example is the occasional home grown counterfeiter, who produces the same product as the Central Bank or Government. A well made counterfeit note works well for the counterfeiter but must be rapidly stopped to prevent destruction of the value of the currency.

    If a home counterfeiter can produce money, then a Central Bank or Government can certainly also produce money. The challenge for the Central Bank or Government is to produce money that has VALUE over time.

    Government establishes value for the money it prints by pairing money with bonds. When a unit of money is created, an additional unit of wealth (called a' bond') is created. Nick Rowe calls a bond 'negative money'. I think it more accurate to say that 'double money' or 'double wealth' is created by this money-bond match. Once created, the Central Bank or Government can control the value of money by removing excessive amounts of money by selling bonds.

    The simple, basic process can be made more complicated by adding players and procedures. The use of 'reserves' for banks is an example, as is a requirement that government NOT borrow directly from the Central Bank.

    Please forgive me for being so bold as to offer a suggestion, but thanks for the opportunity.

    1. Thanks, I welcome feedback.

      I do want to make this easier to follow than some of my articles, so I want to explain things step by step.

      This group of articles is supposed to form a chapter in a book, although things will get reordered and redundant text lopped out. (Each article is stand alone, so some repetition is inevitable.) I will just be describing the operations, and covering the issue of the value of money in another chapter.

    Here is a bunch of papers.


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