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Thursday, June 4, 2015

Understanding Government Finance - Released

The eReport Understanding Government Finance has been released, and is available at online retail stores in ebook format. The current list of retailers includes Amazon, Kobo, the Apple Store, Nook, Scribd, and the Tolino network. The widget above gives an online preview (from Amazon).


The government budget is not like a household budget. This report introduces the financial operations used by a central government with a free-floating currency, and explains how they differ from that of a household or corporation. The focus is on the types of constraints such a government faces, and what can cause such a government to default. This report also acts as an introduction to some of the concepts used by Modern Monetary Theory, a school of thought within economics. Modern Monetary Theory emphasises the real limits of government action, as opposed to purely theoretical views about fiscal policy.

  • Book length: around 34,000 words. Paperback is 122 pages (103 excluding front matter).
  • 18 Figures and charts.

Paperback Edition - ISBN 978-0-9947480-5-8

The paperback edition was released July 4th, 2016. The book will be available at online booksellers, and via special order from bookstores. It will take 5-8 weeks to appear in some channels; it will appear first on Amazon sites.

There have been small differences from the ebook editions as a result of the format change, including the addition of figure numbers and an index.

Once the paperback and Kindle edition of the book are linked (within a few days), it should be possible to buy the paperback and receive the Kindle edition for free (the "book matching program").

EPUB Format - ISBN 978-0-9947480-0-3

There are desktop and tablet apps to read the book, which are available at the retailer's sites. Also, there is Adobe Digital Editions, which allows you to read epubs, and manage them across a several portable devices.

Kindle (Amazon) Format - ISBN 978-0-9947480-1-0

Tablets have a free Kindle app, you can read the book via a web browser ("on the cloud"), and there is also is a free app to read on desktop computers.

Amazon Stores:

Table Of Contents

Chapter 1  Overview
1.1  Introduction
1.2  About this Report
Chapter 2  Understanding Money
2.1  Introduction
2.2  Money Is a Unit of Account
2.3  Chartalism
2.4  Money and Bonds
2.5  Concluding Remarks
Chapter 3  Introduction to Government Finances
3.1  Introduction
3.2  Constraints within Economic Models
3.3  What Is a Central Bank?
3.4  Simplified Framework of Government Finance
3.5  Consolidation of the Treasury and the Central Bank
3.6  Concluding Remarks
Chapter 4  Government Financial Operations
4.1  Introduction
4.2  The Limited Role of Currency
4.3  Transactions Not Involving Currency
4.4  Can the Treasury Run Out of Money?
4.5  Concluding Remarks
Chapter 5  Extensions–Reserves, Government Lending
5.1  Introduction
5.2  Bank Reserves
5.3  Government Lending
5.4  Aside: Quantitative Easing
5.5  Concluding Remarks
Chapter 6  Bonds and Interest Rates
6.1  Introduction
6.2  Bond Yields and the Debt-to-GDP Ratio
6.3  Marginal Analysis and Bond Yields
6.4  Central Bank Control of Short Rates
6.5  Rate Expectations and the Term Premium
6.6  Rollover Risk
6.7  Why Issue Bonds?
6.8  Concluding Remarks
Chapter 7  Domestic Constraints on Deficits
7.1  Introduction
7.2  Functional Finance
7.3  Mainstream Analysis of Government Financing
7.4  The Governmental Budget Constraint
7.5  Paying the Debt Back?
7.6  Complications with the Budget Constraint
7.7  Can We Model Fiscal Constraints?
7.8  Concluding Remarks
Chapter 8  Outside Constraints on Governments
8.1  Introduction
8.2  Borrowing in Foreign Currency
8.3  Gold Parities and Currency Pegs
8.4  One-Sided Currency Pegs
8.5  External Constraints without a Currency Peg
8.6  Sub-Sovereigns
8.7  Concluding Remarks
Chapter 9  Conclusions
A.1  Appendix: Government Bonds and Bills
A1.1  Introduction
A1.2  Treasury Bills
A1.3  Forwards
A1.4  Bonds
A.2  Appendix: Overdraft Economies
A.3  Appendix: Rate Expectations and the Term Premium
Data Sources
References and Further Reading
About the Author

Final Comments

I look forward to receiving your support and feedback. Comments here are highly welcome, as well as reviews on retail web sites.

(c) Brian Romanchuk 2015


  1. Will it get released in PDF format? I unfortunately do not have an e-reader. Thank you.

    1. Hello,

      The short answer - yes it will, but I need to find a distribution channel, as well as convert the document to PDF format.

      The problem with PDF (for me) is that the page layout is fixed. I need to do the same layout work that is required to create the paperback version. I will tackle that problem "soon".

      But I would point out that there are free apps for tablets (e.g. iPad), as well as for desktop computers. Obviously, PDF is more convenient for desktops, but you will have to purchase it from a less familiar web site. (I will not directly fulfil orders as that creates a taxation nightmare for me.)

  2. Thanks for the quick reply. I think I'll give the Kindle version a try, and try to convert it myself to PDF (if I figure out how).

    1. Calibre is a free ebook management and conversion system. I do not know whether it can handle the Kindle version, but I have used it to convert the EPUB version to a PDF. (The downside is that the page size is small, and you end up with a lot of pages.)

      You can also read the Kindle version in a browser ("on the cloud").

      Unfortunately, the EPUB release date was set to Monday (June 8). I will check with the distributor to see whether that can be moved up.

  3. I signed up for Kobo, which gave a $5 credit, so I obtained the eReport as my first purchase without having to enter credit card information. Also, although I don't like most third-party digitial media managers (just a list of files and tools for access would be fine for me) the Kobo reader for Windows is adequate.

    My first comment/question is with regard to the imbalance of safe money market instruments described in section 2.2 Money is a Unit of Account page 5/12. Although it appears on the surface that money market mutual funds (MMMF) are alternatives to bank deposits, in reality, when a depositor moves funds to an MMMF the first order impact is the MMMF now holds deposits in a bank. I think the next step is the aggregate bank engages in repurchase agreement borrowing from the MMMFs, which benefits both banks and MMMFs in their credit operations, so the deposits appear to disappear in aggregate. I know this type of analysis may be beyond the intended scope of the eReport, however, it does raise a question in my mind as to how the imbalance of supply and demand occurs in money markets. The key is understanding that if the aggregate bank wants to expand it would simply borrow from money market managers, and cancel deposits, when deposits are moved to MMMF funds, forming a daisy-chain of liabilities back to the aggregate bank balance sheet. The aggregate bank is in crisis due to roll-over risk of the daisy chain in repo and euro dollar liabilities.

    1. Thanks for your support. And that's good to hear about the sign up bonus. Adobe Digital Editions is useful if you are managing an e-reader (I have a Kobo, which is popular in Canada), or files with DRM. (My ebook does not have DRM.) Calibre also has a very good Epub viewer.

      I tried to avoid being dragged into banking system controversies. If I had been aiming for a full length book I would have added in a discussion of banking, but the report ended up being at about the upper limit of the word count I am targeting. I will probably create a mini-report which is a banking system primer, which I will either price very cheaply (.99) or free. (Banking system controversies come up a lot.)

      As for your question, the imbalance is between the desired portfolios of investors, and the profile of desired borrowings. There is a large demand for safe "money-like" instruments, but very few high quality borrowers want to have large amounts of short-term debt. (If they did, they may no longer be quality borrowers.)

      If there was only the banking system, this maturity mismatch is managed on bank balance sheets. But when we add in the non-bank financial sector, deposits now migrate to "shadow banking" (including vanilla MMFs). The non-bank system can expand its balance sheet in a similar fashion to the formal banking sector; you could treat a migration of a deposit to a MMF as being equivalent to an inter-bank transfer.

      The imbalance of how people want to hold "deposits" (including MMF holdings) versus borrowing desires means that the shadow banking system has to engage in maturity transformation. The banks have the central bank to backstop when this breaks down, but the MMF's were not expected to be backstopped. (During the crisis, they were also bailed out.)

    2. Thanks for the feedback. See Transactions 1-4 of this Fed paper from 1980 to illustrate exactly what I mean by a daisy-chain of Eurobank liabilities back to the aggregate bank balance sheet. When a depositor moves funds to a Eurobank (MMMF) the bank cancels a deposit account and issues a wholesale bank liability to the Eurobank (MMMF). So these so-called deposit alternatives do not mean a loss of bank liabilities simply a change in the mix of bank liabilities. This daisy-chain relates to the issue of how "shadow bank" activity transmits financial fragility to the banking system forcing the central bank to act as lender of last resort to MMMFs, Eurobanks, banks, etc.

      I agree with your approach to focus on the nature of government finance operations in a simplified yet accurate model and look forward to reading the remainder of the eReport.

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  13. Does this use Canada's government as a primary example?

    1. In Chapter 3, the “Simplified Model of government finance” is based on the Canadian model, and I then extend it to resemble the US (and other countries). Since 2020, the US abolished reserves, and so converged with the Canadian model. Meanwhile, the BoC started QE and converged the other way.

      (The old Canadian model had no bank reserves, the US had required reserves, other countries had a system where bank reserves were held, but the level varied more.)

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