Interest Rates and Fiscal Sustainability

摘要

The sustainability of fiscal policy as determined via the orthodox 1GBC framework is irrelevant for understanding the workings of a modern money economy. The orthodox assumption that interest rates are determined in a loanable funds market and the related assumption that inflationary impacts of deficit "monetization" differ from those of deficit "financing" are both fundamentally flawed. Instead, the orthodox view that fiscal deficits might have large effects on interest rates is appropriate only for a non-sovereign-currency-issuing government operating under fixed exchange rates, not for a modern money regime with flexible exchange rates.