Neo-classical
and Modern
Monetary
Theory – a
balance sheet
view
by Dirk Ehnts
Berlin School of Economics and Law
this version: April 5th, 2012
Balance sheet economics
by Dirk Ehnts
Introduction
What is this about?
- understand the creation of money
- understand how money and other financial assets are
transferred and what implications this does have
How does it work?
- a balance sheet perspective is chosen together with doubleentry bookkeeping, inspired by Lavoie (2011) and conversations with the author in the same year
Balance sheet economics
by Dirk Ehnts
A balance sheet:
assets
Institution
money
bonds
stocks
100
300
500
liabilities
equity
external debt
100
800
baseline scenario:
government with (independent) central bank, domestic
currency, big country
Balance sheet economics
by Dirk Ehnts
More balance sheets:
assets
banks
liabilities
assets
government
liabilities
assets
central bank
liabilities
assets
households
liabilities
assets
external sector
liabilities
Balance sheet economics
by Dirk Ehnts
Interdependent balance sheets, cleared through assets from
higher level:
central bank
external
sector
banks
corporate
sector
households
How is ‚money‘ created in this financial web?
Balance sheet economics
by Dirk Ehnts
GOVERNMENT (Treasury and Central Bank):
Buys goods and services, gold, and assets; makes transfer
payments
$ FIAT MONEY $
Inside &
Outside
Money
Source:
Wray (1998, p.112)
(Treasury Coin, Federal Reserve Notes, Bank Reserves)
$
PRIVATE
SECTOR
(High Powered
Money)
$
HOARDS
$
Credit Activity
(Bank money,
commercial paper,
private bonds)
HOUSEHOLDS
Taxes
(Treasury Coin, Federal Reserve Notes, Bank Reserves)
Balance sheet economics
by Dirk Ehnts
The ‚Old‘ Monetary Theory View (I)
assets
central bank
money
loans to banks
100
50
50
assets
money
assets
banks
150
savings
100
loan from CB
100
150
money
liabilities
200
liabilities
200
50
increase in outside money (M) through ‚helicopter drop‘ of
money (no inside money!)
CB controls money supply! (reserve ratios?)
Balance sheet economics
by Dirk Ehnts
The ‚Old‘ Monetary Theory View (II)
assets
central bank
money
bonds
200
100
100
assets
money
bonds
stocks
bonds
banks
100
200
500
600
500
400
savings
equity
liabilities
200
300
liabilities
900
200
increase in government spending (G) does only affect asset
composition (portfolio) of banks („crowding out“)
Balance sheet economics
by Dirk Ehnts
The Modern Monetary Theory View (Ia):
assets
government
money
100
assets
central bank
bonds
100
assets
money
loans
assets
money
bonds
money
banks
90
90
savings
deposits
households
10
100
loans (net)
liabilities
100
liabilities
100
liabilities
90
90
liabilities
0
Balance sheet economics
by Dirk Ehnts
The Modern Monetary Theory View (Ib):
assets
central bank
bonds
money
100
0
30
40
10
assets
money
loans
reserves
bonds
money
reserves
banks
80
90
40
10
120
90
10
70
100
liabilities
100
10
liabilities
savings
deposits
 increase in government spending (G)
(2nd round reserves after giving additional loans of 30 omitted)
90
120
90
Balance sheet economics
by Dirk Ehnts
The Modern Monetary Theory View (II):
assets
central bank
bonds
money
100
10
11
assets
money
loans
reserves
bonds
money
reserves
banks
9
10
110
100
10
11
80
savings
deposits
equity
 increase in inside money (M)
liabilities
100
10
11
liabilities
90
100
110
10
Balance sheet economics
by Dirk Ehnts
The Modern Monetary Theory View (III):
assets
central bank
bonds
money
100
120
10
30
assets
money
loans
reserves
bonds
money
reserves
banks
10
30
100
10
60
80
liabilities
120
100
10
liabilities
savings
deposits
equity
 increase in outside money (M, not G)
90
100
10
Balance sheet economics
by Dirk Ehnts
A comparison: money views ‚old‘ (IS/LM) and ‚new‘ (MMT):
‚old‘
‚new‘
government spending
displaces other assets 1:1
loans create deposits
 no ‚crowding out‘ per se
bonds are sold or tax
income received before
gov‘ spending
government spends, no ‚financing‘
by public needed, CB can monetize
public debt (taxes, bonds: Δliquidity)
monetary policy via
control of money supply
monetary policy via interest rate,
changes in liquidity
CB controls money supply
(via reserves/multiplier)
defensive operations to supply
demanded reserves at target rate
Balance sheet economics
by Dirk Ehnts
Literature
Lavoie, Marc. 2011. The monetary and fiscal nexus of neo-chartalism: A
friendly critical look.
Wray, Randall. 1998. Understanding Modern Money:The Key to Full
Employment and Price Stability. Aldershot and Lyme, NH: Edward Elgar