Shifting Sands and Policy Failures
8. A monetary framework for ﬁscal policy activism 8.1 INTRODUCTION The essential operations of the macroeconomic system are often well explained in an introductory macroeconomics course. Sadly, the rudiments are quickly obfuscated as academic economists seek to replace them with increasingly diﬃcult formal conceptions that distort the understanding students have of actual monetary economies. In this chapter, the rudiments of macroeconomics are restated to present a theoretical framework which demonstrates the actual options and responsibilities that apply to modern governments which issue ﬁat currency (see Mitchell, 1998; Wray, 1998; Mitchell and Mosler, 2002, 2006). We propose this monetary framework as a challenge to the orthodox macroeconomic consensus that we developed in Chapters 5 and 6 which has provided the so-called ‘intellectual authority’ to policy makers who have been intent on pursuing full employability rather than full employment policies. We show that the full employability consensus is not grounded in any logical understanding of the modern monetary system and negates many of the actual options that are available to ﬁat-currency issuing governments. 8.2 MODERN MONETARY ECONOMIES USE FIAT CURRENCIES The starting-point is to understand the central role that government can play in a modern monetary economy. Modern monetary economies use money as the unit of account to pay for goods and services. An important notion is that money is a ﬁat currency, that is, it is convertible only into itself and not legally convertible by government into gold, for instance, as it was under the gold standard. The fact that...
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