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Can Taxes and Bonds Finance Government Spending?

Author

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  • Stephanie Bell

    (The Jerome Levy Economics Institute)

Abstract

This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.

Suggested Citation

  • Stephanie Bell, 1998. "Can Taxes and Bonds Finance Government Spending?," Macroeconomics 9808008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:9808008
    Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 27; figures: included
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/9808/9808008.pdf
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    Cited by:

    1. Lachlan McCall, 2021. "The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy," The Economic Record, The Economic Society of Australia, vol. 97(317), pages 321-325, June.
    2. L. Randall Wray, 1999. "The 1966 Financial Crisis: A Case of Minskian Instability?," Economics Working Paper Archive wp_262, Levy Economics Institute.
    3. L. Randall Wray, 1999. "The 1966 Financial Crisis: Financial instability or political economy?," Review of Political Economy, Taylor & Francis Journals, vol. 11(4), pages 415-425.
    4. Jan Toporowski, 2013. "The Elgar Companion to Hyman Minsky," Review of Political Economy, Taylor & Francis Journals, vol. 25(1), pages 175-177, January.
    5. Dimitri B. Papadimitriou & L. Randall Wray, 2010. "Introduction: Minsky on Money, Banking and Finance," Chapters, in: Dimitri B. Papadimitriou & L. Randall Wray (ed.), The Elgar Companion to Hyman Minsky, chapter 1, Edward Elgar Publishing.
    6. Tony Aspromourgos, 2000. "Is an Employer-of-Last-Resort Policy Sustainable? A review article," Review of Political Economy, Taylor & Francis Journals, vol. 12(2), pages 141-155.

    More about this item

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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