Fiscal effects on reserves and the independence of the Fed

Abstract

Modern governments with a floating currency face no inherent financial constraints. Unfortunately, most modern macro-theorists continue to write as if these nations were financially constrained by (1) the magnitude of current tax "revenue" and (2) the private sector's willingness to "finance" (i.e., buy bonds) spending in excess of (1). Such a position badly misrepresents the actual workings of government finance. In this paper, we provide an abbreviated description of the manner in which the U.S. government carries out its fiscal operations in practice, including an analysis of coordination of the activities of the Fed and Treasury.

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