Modern Money Theory, and Interrelations Between the Treasury and Central Bank: The Case of the United States

One of the main contributions of modern money theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space. Not only can they issue their own currency, but also any self-imposed constraint on budgetary operations can be easily bypassed. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the Treasury and central banks of several countries, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and non-sovereign governments. In terms of theory, MMT argues that taxes and bond offerings are not best conceptualized as funding sources for the Treasury, but rather as reserve draining devices to maintain price and interest-rate stability. As such, they are necessary even if a government issues its currency to spend. This theoretical conclusion holds even if the Treasury may be required to tax and issue bond to fund itself. Another theoretical conclusion is that merging the central bank and the Treasury in a government sector can be done without loss of generality for monetarily sovereign governments. Separating the two adds complexity without bringing insights. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing evidence of the interconnectedness of the Treasury and the central bank in the United States.