Can Taxes and Bonds Finance Government Spending?
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Stephanie Bell: The Jerome Levy Economics Institute
Macroeconomics from EconWPA
This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe, nep-pke and nep-pub
Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 27; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:9808008
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