Abstract

The traditional endogenous money approach can be generalised substantially by including the insights of Modern Money Theory regarding the necessary coordination of fiscal and monetary policies. A monetarily sovereign government is composed of two entities involved in the issuance and redemption of government monetary instruments. As such, one should include the role of the Treasury in monetary policy and the role of the central bank in fiscal policy. The paper suggests a simple way to model that interaction, shows some of the theoretical insights that can be drawn from that interaction and illustrates the relevance of that interaction with the monetary and fiscal practices of the US Treasury and the Federal Reserve over the past century. Times of stress in the monetary system, such as the recent Great Recession, usually bring to light more forcefully this necessary interaction.

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