The Monetary and Fiscal Nexus of Neo-Chartalism: A Friendly Critique

A number of post-Keynesian authors, called the neo-chartalists, have argued that the government does not face a budget constraint similar to that of households and that government with sovereign currencies run no risk of default, even with high debt-to-GDP ratio. This stands in contrast to countries...

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Bibliographic Details
Published in:	Journal of economic issues 2013-03, Vol.47 (1), p.1-32
Main Author:	Lavoie, Marc
Format:	Article
Language:	eng
Subjects:	Appropriations and expenditures Budget constraint central bank Central banks Clearance & settlement clearing and settlement system Consolidation Currency Debt Eastern Europe Economic aspects Economic crisis Economic policy Economic theory Economics Economics and Finance Economists Employment Eurocurrency market Eurozone Finance Fiscal policy Forecasts and trends Government spending Gross domestic product Households Humanities and Social Sciences International finance Keynesian economics Keynesian theory Market trend/market analysis Monetary policy National debt neo-chartalism Post-Keynesianism Public debts Public sector Risk Sovereign debt Studies Taxes Western Europe
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Summary:	A number of post-Keynesian authors, called the neo-chartalists, have argued that the government does not face a budget constraint similar to that of households and that government with sovereign currencies run no risk of default, even with high debt-to-GDP ratio. This stands in contrast to countries in the eurozone, where the central bank does not normally purchase sovereign debt. While these claims now seem to be accepted by some economists, neo-chartalists have also made a number of controversial claims, including that the government spends simply by crediting a private-sector-bank account at the central bank; that the government does need to borrow to deficit-spend; and that taxes do not finance government expenditures. This paper shows that these surprising statements do have some logic, once one assumes the consolidation of the government sector and the central bank into a unique entity, the state. The paper further argues, however, that these paradoxical claims end up being counter-productive since consolidation is counter-factual.
ISSN:	0021-3624 1946-326X