Government Finance and Money Creation in China: An MMT Perspective

The traditional theory of money creation and supply has been widely questioned and criticized after the Global Financial Crisis in 2008. The existing empirical research on China’s money supply has been basically based on this traditional theoretical framework of “monetary base-money multiplier,” and ignored the important role of government finance in money creation. From the perspective of MMT, this paper investigates the evolution of the role of fiscal policy in China’s money creation, and analyzes the macroeconomic impact of the fiscal creation of money. In the past 70 years, China has experienced a planned economy regime, a fiscal dominance regime and a monetary dominance regime. And during this time the dominant mode of money creation has gradually shifted from fiscal creation to credit creation, to the extent that the old fiscal creation mode has been ignored or even disdained. However, the fiscal creation of money is still of great importance. Compared with credit creation, it helps to promote the development of real economy, reduce systemic financial risks and narrow the wealth gap. This article argues that China should increase the contribution of fiscal expansion to money creation and reduce the dependence of money growth on credit, so as to better achieve the three goals of stable growth, risk prevention and structural adjustment.