By
JKHIntroduction:
Fiscal policy includes federal spending on goods and services, taxing, and debt issuance. Monetary policy includes the management of a central bank that issues money claims to commercial banks, the Treasury, and the public. A sovereign state is responsible for fiscal and monetary policy, executed through treasury and central banking operations respectively.
Fiscal and monetary systems do not exist without specific institutional design. In this regard, there is a difference between the facts of actual institutional design, and conceptual distillations that infer hypothetical design. Any overall view of actual treasury and central banking operations should be portrayed accurately in this respect. For example, there is a difference between the consolidated view of separate Treasury and central bank institutions as they actually operate, versus the view of an implied but unstated counterfactual in the sense of a unified institution. The actual operation of separate institutions is not at all the same as that implied by a unified counterfactual institution.
For example, there is a difference between the actual case of a central bank both acquiring Treasury bonds and issuing currency, and the hypothetical case of a consolidated state entity that could in concept issue currency without being involved with bonds. The way in which we describe the real world of monetary operations should ensure the distinction between factual arrangements and such imagined ones. Such clarification is necessary for an accurate description of modern monetary operations. Conversely, confusing factual and hypothetical operations is a prescription for ambiguity and error in understanding this subject.
The phrase “currency issuer†has been popularized over the past several years in blogosphere discussion of fiscal and monetary operations. Although the term embeds a useful idea, it has become jargonized, with ambiguous inferences and murkiness of focus.
There are two general ways of looking at the idea of “currency issuerâ€:
(Continued)Treasury and the Central Bank – the USA example
The USA has separate Treasury and Federal Reserve institutions. They are separate in the sense of both policy responsibility and operational execution. The most obvious evidence for policy separation is that the Fed sets policy for the fed funds rate and Treasury sets policy for issuing debt. Some make the mistake of thinking that because the Fed and Treasury co-ordinate and exchange information on certain operational details, this suggests that the Fed is not independent. But this is not material to the appropriate measure of Fed independence. The notion of independence applies to policy responsibility, not operational co-ordination that is mutually beneficial for the Fed and Treasury in the execution of their respective mandates. For example, the Fed is in regular contact regarding the Treasury’s planned movement of funds between its Fed deposit account and the Treasury tax and loan accounts (TTL) sited at the commercial banks. But that has no bearing on the Fed’s independence in setting monetary policy, including the target Fed funds rate. It is an information flow that helps with effective implementation of policy. Moreover, the Fed looks to the major commercial banks for comparable information regarding important cash flow items that may affect their reserve account positions.
Also, some think the fact that the Fed is accountable to Congress means the Fed is not independent. But the relevant context is the responsibility for monetary policy relative to fiscal policy. This obviously allows for fiscal information input when formulating appropriate monetary policy. As far as reports to Congress are concerned, the Fed Chairman is accountable for an explanation of how the Fed executes policy and operational responsibilities. But it isn’t Treasury that the Chairman is accountable to.
(Contiinued)More on this can be found
hereThe following papers are excellent on fiscal/monetary operations:
The Monetary and Fiscal Nexus of neo-Chartalism: A Friendly Critical LookMarc Lavoie
Department of Economics, University of Ottawa
October 2011
http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf Modern Money Theory and the ‘Real-World’ Accounting of 1-1<0:
The U.S. Treasury Does Not Spend as per a Bank
Brett Fiebiger
November 2011
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf Both papers are instructive on modern fiscal and monetary operations. They were also helpful to the formulation of the contingent institutional approach used in this essay, an approach that seeks to separate factual and counterfactual versions of fiscal and monetary operations.
