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Making Fiscal Money Work

Proposals for a new system of “fiscal money” have increasingly appeared in political debates in Italy, where budget constraints and a lack of monetary sovereignty have tied policymakers’ hands. If it is properly designed, such a system could substantially boost economic output and public revenues at little to no cost.

ROME – In a recent commentary, Yanis Varoufakis of the University of Athens pointed out the merits of giving national governments a greater say in domestic money creation. Varoufakis calls for a new parallel payments system based on “fiscal money,” or money backed by future taxes, and he proposes a complex mechanism for creating such money.

In response, we would direct readers to our own fiscal-money proposal, which would be simpler and easier to adopt than the system Varoufakis describes. We devised the idea in our “Manifesto for Italy” in 2014, when we were looking for a policy instrument that could revive aggregate demand in an economy with limited fiscal space and no monetary sovereignty. As we argued then, such an instrument would allow Italy to recover from its economic crisis without leaving the eurozone or violating European Union rules.

Our proposal evolved into a widely read e-book and a series of articles, in which we developed a rigorous definition of fiscal money, and simulated a fiscal-money program using Italian economic data. We also considered how fiscal money would work in different contexts, by comparing our proposal to various parallel-currency proposals for Greece, and to the economic policies of Hjalmar Schacht, the architect of Germany’s economic recovery in the 1930s.

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