From the State Theory of Money to Modern Money Theory

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• Working Paper No.1035 04 January 2024

  The Swedish Monetary System from a Balance Sheet Perspective

  Dirk Ehnts and Jussi Ora
  Abstract

  In this paper, we discuss the balance sheet mechanics of the Swedish government. We examine spending, government bond purchases, and tax payments. As long as the Swedish central bank, which is created through Swedish laws, supports the Swedish central government, it cannot run out of money. The Swedish government therefore plays a large role in the Swedish economy. It can and should target full employment and price stability, bringing to bear its fiscal power.

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• Working Paper No.1023 14 July 2023

  Climate Change and Fiscal Marksmanship

  Balamuraly B, Lekha S. Chakraborty, Amandeep Kaur and Ajay Narayan Jha
  Abstract

  According to the theory of efficient markets, economic agents use all available information to form rational expectations. The rational expectations hypothesis asserts that information is scarce, the economic system generally does not waste information, and that expectations depend specifically on the structure of the entire system. Fiscal marksmanship—the accuracy of budgetary forecasting—can be one important piece of such information that rational agents must consider in forming expectations. Against the backdrop of fiscal rules, our paper explores the budgetary forecast errors of climate change–related public spending in India. The fiscal rules stipulate that fiscal deficit–to–GDP ratio should be maintained at 3 percent. However, in the post-COVID fiscal strategy, a medium-term fiscal consolidation path of 4.5 percent fiscal deficit–to­–GDP is envisioned by 2025–26. Within this fiscal consolidation framework, we analyzed the budget credibility of fiscal commitments for climate change in India. We analyzed the fiscal behavioral variables in terms of bias, variation, and randomness, and captured the systemic variations in budgetary forecast related to climate change for a period 2017–18 to 2020–21 across sectors. We identified the sectors where systematic components of forecasting errors are relatively higher than random components, where minimizing errors through altering the fiscal behavioral models is done by revising the assumptions and by applying better forecasting methods. A state-level decomposition of the public spending revealed that disaggregated fiscal space available for developmental spending constitutes around 60 percent of the total. However, identifying the specifically targeted public spending related to climate change across all states and analyzing its fiscal markmanship can further the subnational inferences.

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• Working Paper No.1015 20 February 2023

  CBDC Next-Level: A New Architecture for Financial “Super-Stability” 

  Biagio Bossone and Michael Haines
  Abstract

  Fractional reserve regimes generate fragile banking, and full reserve regimes (e.g., narrow banking) remove fragility at the cost of suppressing the role of banks as lenders. A Central Bank Digital Currency (CBDC) could provide safe money, but at the cost of potentially disrupting bank lending. Our aim is to avoid this potential disruption. Building on the recent literature on CBDCs, in this study we propose what we call the “CBDC next-level model,” whereby the central bank creates money by lending to banks, and banks on-lend the proceeds to the economy. The proposed model would allow for deposits to be taken off the balance sheet of banks and into the balance sheet of the central bank, thereby removing significant risk from the banking system without adversely impacting banks’ basic business. Once CBDC is injected in the system, irrespective of however it is used, wherever it accumulates, and whoever holds and uses it, it will always represent central bank equity, and no losses or defaults by individual banks or borrowers can ever dent it or weaken the central bank’s capital position or hurt depositors. Yet, individual borrowers and banks would still be required to honor their debt in full, lest they would be bound to exit the market or even be forced into bankruptcy. The CBDC next-level model solution would eliminate the threat of bank runs and system collapse and induce a degree of financial stability (“super-stability”) that would be unparalleled by any existing banking system.

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