En pocas y concisas palabras, Frances Coppola sobre la creación de dinero:
"When banks purchase primary bond issues from government, government spending is not sterilised. Sterilisation of the monetary effects of government spending happens when banks sell on government bonds to non-banks, unless non-banks borrow from banks to fund the purchases or cover consequent shortfalls.
In practice, government spending does increase the broad money supply even if it is fully covered by bond issuance. Bond issuance cannot wholly sterilise it, because banks don't sell their entire holdings of government bonds - they retain a substantial proportion as collateral for repo funding. Opportunity costs for non-banks, too, may lead to incomplete sterilisation due to higher bank lending to non-banks. So it is probably fair to say that bond issuance is not a very effective way of sterilising the monetary effects of government deficit spending. Taxation is the only fully effective means, and even then only if it is efficient, which most tax systems are not. Over time, therefore, we would expect persistent government deficit spending to increase the broad money supply.
Whether or not the increase in broad money arising from incomplete sterilisation of government deficit spending - or even outright monetisation of government deficit spending by the central bank - is inflationary in my view depends on how the money is distributed and the purpose for which it is used. I think it is fallacious to assume that increasing the quantity of broad money, whether through central bank money creation, government deficit spending or simply through higher bank lending, necessarily raises consumer price inflation. Looking at the quantity theory of money equation:
MV = PY
with M defined in this case as M3, we can see that an increase in P (inflation) is only one of the possible consequences of a rise in M. There could be an increase in output (Y) with no effect on inflation, or there could be no effect at all because people just sit on the money (V falls). Or, not shown in this equation, asset prices could rise.
I don't propose to discuss this any further here. Better folk than me have had endless debates about it. At JP Koning's suggestion, I refer those who are interested to Tobin's theory of reflux, Yeager's refutation of it, and more recently the extended argument between David Glasner, Nick Rowe and many others. The causes of inflation are endlessly puzzling and supply-of-money theories are hopelessly inadequate. As ever, in monetary economics, it just isn't that simple."
"When banks purchase primary bond issues from government, government spending is not sterilised. Sterilisation of the monetary effects of government spending happens when banks sell on government bonds to non-banks, unless non-banks borrow from banks to fund the purchases or cover consequent shortfalls.
In practice, government spending does increase the broad money supply even if it is fully covered by bond issuance. Bond issuance cannot wholly sterilise it, because banks don't sell their entire holdings of government bonds - they retain a substantial proportion as collateral for repo funding. Opportunity costs for non-banks, too, may lead to incomplete sterilisation due to higher bank lending to non-banks. So it is probably fair to say that bond issuance is not a very effective way of sterilising the monetary effects of government deficit spending. Taxation is the only fully effective means, and even then only if it is efficient, which most tax systems are not. Over time, therefore, we would expect persistent government deficit spending to increase the broad money supply.
Whether or not the increase in broad money arising from incomplete sterilisation of government deficit spending - or even outright monetisation of government deficit spending by the central bank - is inflationary in my view depends on how the money is distributed and the purpose for which it is used. I think it is fallacious to assume that increasing the quantity of broad money, whether through central bank money creation, government deficit spending or simply through higher bank lending, necessarily raises consumer price inflation. Looking at the quantity theory of money equation:
MV = PY
with M defined in this case as M3, we can see that an increase in P (inflation) is only one of the possible consequences of a rise in M. There could be an increase in output (Y) with no effect on inflation, or there could be no effect at all because people just sit on the money (V falls). Or, not shown in this equation, asset prices could rise.
I don't propose to discuss this any further here. Better folk than me have had endless debates about it. At JP Koning's suggestion, I refer those who are interested to Tobin's theory of reflux, Yeager's refutation of it, and more recently the extended argument between David Glasner, Nick Rowe and many others. The causes of inflation are endlessly puzzling and supply-of-money theories are hopelessly inadequate. As ever, in monetary economics, it just isn't that simple."
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