workings of a public money system of open …bs.doshisha.ac.jp/.../26831/file/dbs-10-02.pdfworkings...

47
Workings of A Public Money System of Open Macroeconomies – Modeling the American Monetary Act Completed – Kaoru Yamaguchi Doshisha University Kyoto 602-8580, Japan E-mail: [email protected] Abstract Being intensified by the recent financial crisis in 2008, debt crises seem to be looming ahead among many OECD countries due to the runaway accumulation of government debts. This paper first explores them as a systemic failure of the current debt money system. Secondly, with an introduction of open macroeconomies, it examines how the current sys- tem can cope with the liquidation of government debt, and obtains that the liquidation of debts triggers recessions, unemployment and foreign economic recessions contagiously. Thirdly, it explores the workings of a public money system proposed by the American Monetary Act and finds that the liquidation under this alternative system can be put into effect without causing recessions, unemployment and inflation as well as foreign recessions, and simultaneously attain a higher economic growth. Finally, public money policies that incorporate balancing feedback loops such as anti-recession and anti-inflation are introduced for curbing GDP gap and inflation. They are posed to be simpler and more effective than the com- plicated Keynesian policies. 1 Introduction: Public vs Debt Money I have explored in the paper [16] 1 how accumulating government debts could be liquidated under two different macroeconomic systems; that is, a current This paper is submitted to the 29th International Conference of the System Dynamics Society, Washington D.C., USA, July 25-29, 2011. 1 With a modest revision, the paper was presented at the monetary reform conf. in Chicago, organized by the American Monetary Institute, on Oct. 1, 2010, for which the following award was given; “Advancement of Monetary Science and Reform Award to Prof. Kaoru Yamaguchi, Kyoto, Japan, For his advanced work in modeling the effects on national debt of the American Monetary Act”. 1

Upload: lenhu

Post on 30-May-2018

215 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Workings of A Public Money System

of Open Macroeconomies– Modeling the American Monetary Act Completed –

Kaoru Yamaguchi ∗

Doshisha UniversityKyoto 602-8580, Japan

E-mail: [email protected]

Abstract

Being intensified by the recent financial crisis in 2008, debt crises seemto be looming ahead among many OECD countries due to the runawayaccumulation of government debts. This paper first explores them as asystemic failure of the current debt money system. Secondly, with anintroduction of open macroeconomies, it examines how the current sys-tem can cope with the liquidation of government debt, and obtains thatthe liquidation of debts triggers recessions, unemployment and foreigneconomic recessions contagiously. Thirdly, it explores the workings of apublic money system proposed by the American Monetary Act and findsthat the liquidation under this alternative system can be put into effectwithout causing recessions, unemployment and inflation as well as foreignrecessions, and simultaneously attain a higher economic growth. Finally,public money policies that incorporate balancing feedback loops such asanti-recession and anti-inflation are introduced for curbing GDP gap andinflation. They are posed to be simpler and more effective than the com-plicated Keynesian policies.

1 Introduction: Public vs Debt Money

I have explored in the paper [16]1 how accumulating government debts couldbe liquidated under two different macroeconomic systems; that is, a current

∗This paper is submitted to the 29th International Conference of the System DynamicsSociety, Washington D.C., USA, July 25-29, 2011.

1With a modest revision, the paper was presented at the monetary reform conf. in Chicago,organized by the American Monetary Institute, on Oct. 1, 2010, for which the following awardwas given; “Advancement of Monetary Science and Reform Award to Prof. Kaoru Yamaguchi,Kyoto, Japan, For his advanced work in modeling the effects on national debt of the AmericanMonetary Act”.

1

bs-sharp
テキストボックス
DBS-10-02
bs-sharp
テキストボックス
DBS Discussion Paper Series supported by the OMRON Foundation.DBS
Page 2: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

macroeconomic system of money as debt, and a debt-free macroeconomic systemadvocated by the American Monetary Act. What I have found is that theliquidation of government debt under the current macroeconomic system ofmoney as debt is very costly; that is, it triggers economic recessions, whilethe liquidation process under a debt-free money system can be accomplishedwithout causing recessions and inflations, and, to our surprise, with a highereconomic growth in the due process. The results are, however, obtained in asimplified closed macroeconomic system in which no labor market exists.

Accordingly, the purpose of this paper is to expand the previous simplemacroeconomic system to complete open macroeconomies in which labor mar-ket and foreign exchange market exist, and analyze if similar results could beobtained in the open macroeconomies for a system of money as debt and adebt-free money system. For the examination, I have felt a strong necessityto briefly redefine money and its system in this introductory section to avoidfurther confusions caused by different usage of terminologies. In the previouspaper, a system of money as debt was used to describe the current monetarysystem, and a debt-free money system was used as a system that is proposed bythe American Monetary Act. Let us redefine these terminologies in a uniformfashion as follows.

Public Money

From early days in history money has been in circulation as a legal tender asAristotle (384-322 BC) phrased that “Money exists not by nature but by law[17].” Hence, money has been by definition a fiat money as legal tender. Moneythus created, whether it could be tangible or intangible, has to have the followingthree features as explained by many economics textbooks.

• Medium of Exchange

• Unit of Account

• Store of Value

Money

Commodity

Receipts Payments

Sales Purchases

Figure 1: Public Money

Using system dynamics con-cept of stock and flow, thesefunctions of money may beuniformly illustrated in Figure1 in which flows of money suchas receipts and payments ac-complish counter-transactionsof sales and purchases of com-modity (means of exchange)according to a uniform scale(unit of account), and theamount of money thus circulated is stored as a stock of money as a result

2

Page 3: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Fiat Money as Legal Tender

Public Money Debt Money

Non-metal Shell, Cloth (Silk)Commodities Woods, Stones, etc

Metal Non-precious MetalsCoinage Copper, Silver, Gold

Paper Sovereign Notes Gold(smith) CertificatesNotes Government Notes (Central)Bank Notes

Intangible DepositsNumbers (Credit by Loan)

Digits Electronic Substitutes Electronic Substitutes

Table 1: Public vs Debt Money

of these transactions (store of value). In system dynamics stocks of money andcommodity can be said to co-flow all the time in an opposite direction.

Money, having the above three features as a legal tender, could take a formof commodities such as shell, silk (cloth) and stone, of precious metals such ascopper, silver and gold, of paper such as Goldsmith and gold certificates andbank notes, and of intangible numbers and electronic digits. In short, any formthat performs three features has been generally accepted as money that has apurchasing power. Let us call such money public money, so long as it is a fiatmoney of legal tender, and issued only by the government and sovereignty aspublic utility for transactions, as summarized in Table 1.

Debt Money

Tangible money currently in use are coinage and bank notes. Coins are mintedby the government as subsidiary currency. Hence, it is public money by defi-nition. On the other hand, bank notes are issued by central banks that are inde-pendent of the government and privately owned in many countries.

Commodity

SalesPurchases

Money(Currency inCirculation)

Deposits

Loan

Money Supply

Receipts (MS) Payments (MS)

Figure 2: Debt Money

For instance, Federal Re-serve System, the centralbank in the United States,is 100% privately owned [2]and Bank of Japan is 45%privately owned. Hence,governments are obliged toborrow from central banksand in this sense banknotes are regarded as a partof debt money.

Theoretically, the is-suance of money by the pri-vate organizations can be

3

Page 4: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

possible only when government or sovereignty legally allow them to createmoney, since “money exists by law” as pointed out above. Historically thisoccurred when Bank of England was founded in 1694 and endowed with theright to issue money as its bank notes. In the United States, this was institutedby the Federal Reserve Act in 1913.

In addition to the tangible money such as bank notes and coinage, bankdeposits or credits created as loans by commercial banks also play a role ofmoney, though intangible, because they can be withdrawn any time, at request,for transactions. This process of credit creation is made possible by the so-calledfractional banking system. For detailed analysis see [10].

In sum, under the current financial system, currency in circulation such asbank notes and coinage and bank deposits play a role of money. The amountof money that is available at a certain point of time is called money supply orstock, which is thus defined as

Money Supply = Currency in Circulation + Deposits (1)

In system dynamics terminology, it is nothing but a money stock as illustratedin Figure 2. To distinguish this type of money from public money, let us call itdebt money, because money of this type is only created when government andcommercial banks come to borrow from central banks (high-powered money),and producers and consumers come to borrow from commercial banks (bankdeposits and credits are called low-powered money). In my previous paper [16],this system is called system of money as debt. Almost all of macroeconomictextbooks in use such as [4], [5], [6], [3] justify the current macroeconomicsystem of debt money without mentioning an alternative system, if any, suchas the money system proposed by the American Monetary Act to be explainedbelow.

The American Monetary Act

After the Great Depression in 1929, two banking reforms were proposed to avoidfurther serious recessions; that is, the Banking Act of 1933 known as the Glass-Steagall Act and the Chicago Plan. The Glass-Steagall Act was intended to sep-arate banking activities between Wall Street investment banks and depositorybanks. The act was unfortunately repealed in 1999 by the Gramm-Leach-BlileyAct. This repeal was criticized as having triggered the recent financial crisisof subprime mortgage loans following the collapse of Lehman Brothers in 2008.On-going movement of financial reforms in the US are an attempt to bring backa little bit stricter banking regulations in the spirit of the Glass-Steagal Act.

The other reform was simultaneously proclaimed by great economists in1930s such as Henry Simons and Paul Douglas of Chicago, Irving Fisher ofYale, Frank Graham and Charles Whittlesley of Princeton, Earl Hamilton ofDuke, etc [18], who had seen a debt money system as a root cause of the GreatDepression. Their solution for avoiding a possible “Great Depression” in thefuture is called the Chicago Plan. For instance, Irving Fisher, a great monetary

4

Page 5: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

economist in those days, was active in establishing a monetary reform to stabilizethe economy out of recessions such as the Great Depression. His own plan isknown as “100% Money Plan”

I have come to believe that the plan, ”properly worked out andapplied, is incomparably the best proposal ever offered for speedilyand permanently solving the problem of depressions; for it wouldremove the chief cause of both booms and depressions, namely theinstability of demand deposits, tied as they are now, to bank loans.”[1, p. 8]

In contrast with the Glass-Steagal Act, the Chicago Plan has failed to be im-plemented.

The American Monetary Act2 endeavors to restore the proposal of theChicago Plan or 100% Money Plan by replacing the Federal Reserve Act of1913. In our terminology above, it is nothing but the restoration of a publicmoney system from a debt money system. Specifically, the Act tries to incor-porate the following three features. For details see [16] and [17, 18].

• Governmental control over the issue of money

• Abolishment of credit creation with full reserve ratio of 100%

• Constant inflow of money to sustain economic growth and welfare

When full reserve system is implemented by the Act, bank reserves becomeequal to deposits so that we have

Money Supply = Currency in Circulation + Deposits= Currency in Circulation + Reserves= High-Powered Money (2)

Accordingly, under the public money system, money is created only by thegovernment, and money supply becomes public money3.

As a system dynamics researcher, I have become interested in the systemdesign of macroeconomics proposed by the American Monetary Act, and posed aquestion whether this public money system of macroeconomy can solve the mostimminent problem our economy is facing; that it, accumulation of government

2On Dec. 17, 2010, a bill based on the American Monetary Act was introduced to theUS House Committee on Financial Services by the congressman Dennis Kucinich. This bill iscalled H.R. 6550 National Emergency Employment Defense Act of 2010 (NEED). A similarproposal “Towards A Twenty-First Century Banking And Monetary System” was recentlysubmitted jointly by PositiveMoney, nef(the new economics foundation), and Prof. RichardWerner of the Univ. of Southampton, to the Independent Commission on Banking, UK.

3Money supply is also defined in terms of high-powered money as

Money Supply = m ∗ High-Powered Money (3)

where m is a money multiplier. Under a full reserve system, money multiplier becomes unitary,m = 1, so that money can no longer be created by commercial banks.

5

Page 6: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

debt. My previous work [16] positively answered the question under a simplemodeling framework. Before exploring it under our complete model of openmacroeconomies, let us probe how serious our current issue of accumulatingdebt is.

2 Debt Crises As A Systemic Failure

Debt Crises Looming Ahead

Being intensified by the recent financial crisis following the collapse of LehmanBrothers in 2008, severe crisis of sovereign or government debts seems to belooming ahead. Let us explore how serious our accumulating debts are. Ta-ble 2 shows that, among 33 OECD countries, 17 countries are suffering fromhigher debt-to-GDP ratios of more than 50% in 2010. Average ratio of these33 countries is 66.7%, while world average ratio of 131 countries is 58.3%4.This implies that developed countries are facing debt crises more seriously thanmany developing countries. Figure3 illustrates how debt-to-GDP ratios havebeen increasing over time since 1990 among G7 countries5.

Country Ratio(%) Country Ratio(%)

Japan 196.4 Israel 77.3Greece 144.0 Germany 74.8Iceland 123.8 Hungary 72.1Italy 118.1 Austria 68.6Belgium 102.5 United Kingdom 68.1Ireland 98.5 Netherlands 64.6United States 96.4 Spain 63.4France 83.5 Poland 50.5Portugal 83.2 OECD 66.7Canada 82.9 World 58.3

Table 2: Public Debt-GDP Ratio(%) of OECD Countries in 2010

Let us now take a look at the US national debt. Following the Lehman shockin 2008, US government is forced to bail out troubled banks and corporationswith taxpayers’s money, and the Fed continued printing money to purchasepoisoned subprime and related securities. In fact, according to the FederalRelease Statistical Release H.4.1 the Fed assets jumped more than doubles in ayear from $905 billion, Sept. 3, 2008, to $2,086 billion on Sept. 2, 2009. Thisunusual increase was mainly caused by the abnormal purchase of federal agencydebt securities ($119 billion) and mortgage-backed securities ($625 billion). In

4Data of 131 countries for 2010 are taken from CIA Factbook athttps://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.htmlexcept USA Data, which is taken from US National Debt Clock Real Time on Feb. 12, 2011at http://www.usdebtclock.org/

5The figure is obtained from http://www.forexblog.org/categor/japanese-yen

6

Page 7: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Figure 3: National Debt-to-GDP Ratios of G-7 Countries

addition, US government is obliged to spend more budget on war in MiddleEast. These factors contributed to accumulate US national debt beyond 14trillion dollars as of Feb. 2011, more than 4 trillion dollars’ increase sinceLehman shock in Sept. 2008. Figure 4 (line 2) illustrates how fast US nationaldebt has been accumulating almost exponentially6. From a simple calibration

US National Debt

32,000

24,000

16,000

8,000

02 2 2 2

22

22 2

2

2

1 1 1 1 1 1 11

11

1

1

1

1

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Time (Year)

Bil

lion D

oll

ars

US Debt : Forecasted Debt 1 1 1 1 1 1 1 1

US Debt : US National Debt 2 2 2 2 2 2 2 2

Figure 4: U.S. National Debt and its Forecast: 1970 - 2020

6Data illustrated in the Figure are obtained from TreasuryDirect Web page,http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

7

Page 8: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

of data between 1970 through 2011 , the best fit of their exponential growthrate is calculated to be 9% !, which in turn implies that a doubling time ofaccumulating debt is 7.7 years. If the current US national debt continues togrow at this rate, this means that the doubling year of the 14 trillion dollars’debt in 2011 will be 2019. In fact, our debt forecast of that year becomes 29trillion dollars. Moreover, in 2020, the US national debt will become higherthan 31 trillion dollars, while US GDP in 2020 is estimated to be 24 trilliondollars according to the Budget of the U.S. Government, Fiscal Year 2011; thatis, the debt-to-GDP ratio in the US will be 129%!.

Can such an exponentially increasing debt be sustained. From system dy-namics point of view, it is absolutely impossible. In fact, following the financialcrisis of 2008, sovereign debt crisis hit Greece in 2009, then Ireland, and nowPortugal is said to be facing her debt crisis. Debt crises are indeed loomingahead among OECD countries.

A Systemic Failure of Debt Money

From the quantity theory of money MV = PT , where M is money supply, Vis its velocity, P is a price level and T is the amount of annual transactions, itcan be easily foreseen that transactions of a constantly growing economy PTdemand for more money M being incessantly put into circulation. Under a debtmoney system this increasing demand for money has been met by the followingmonetary standards.

Gold Standard Failed (1930s) Historically speaking gold standard originatedfrom the transactions of goldsmith certificates, which eventually developedinto convertible bank notes with gold. Due to the limitation of the sup-ply of gold, this gold standard system of providing money supply wasabandoned in 1930s, following the Great Depression.

Gold-Dollar Standard Failed (1971) Gold standard system was replacedwith the Bretton Woods system of monetary management in 1944. Underthe system, convertibility with gold is maintained indirectly through USdollar as a key currency, and accordingly called the gold-dollar standard.Due to the increasing demand for gold from European countries, US pres-ident Richard Nixon was forced to suspend gold-dollar convertibility in1971, and the so-called Nixon Shock hit the world economy.

Dollar Standard Collapsing (2010s?) Following the Nixon shock, flexibleforeign exchange rates were introduced, and US dollar began to be usedas a world-wide key currency without being supported by gold. As aresult, central banks acquired a free hand of printing money without beingconstrained by the amount of gold. Due to the exponentially accumulatingdebt of the US government as observed above, US dollar is now under apressure of devaluation, and the dollar standard system of the last 40 yearsis destined to collapse sooner or later.

8

Page 9: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

As briefly assessed above, we are now facing the third major systemic failuresof debt money, following the failures of gold standard and gold-dollar standardsystems. Specifically, our current debt money system seems to be heading to-ward three impasses: defaults, meltdown and hyper-inflation. By using causalloop diagram of Figure 5, let us now explore a conceivable systemic failure ofthe current debt money system.

Debt

BorrowingInterest

Payment

Interest

Rate

Budget

Deficit

Tax

Revenues

Government

Expenditures

Debt Crisis

GovernmentSecurityPrices

Bank/ Corporate

Collapses

Bailout / Stimulus

Packages

Money

Supply

Housing

Bubbles

Financial Crisis

Hyper-

Inflation

Spending

DefaultsMeltdown

Figure 5: Impasses of Defaults, Meltdown and Hyper-Inflation

Default

A core loop of the systemic failure is the debt crisis loop. This is a typicalreinforcing loop in which debts increase exponentially, which in turn increasesinterest payment, which contributes to accumulate government deficit into debt.In fact, interest payment is approximately as high as one third of tax revenuesin the US and one fourth in Japan. Eventually, governments may get con-fronted with more difficulties to continue borrowing for debt reimbursements,and eventually be forced to declare defaults.

Meltdown

Exponential growth of debt eventually leads to the second loop of financial crisis.To be specific, a runaway accumulation of government debt may cause nominal

9

Page 10: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

interest rate to increase eventually, because government would be forced to keepborrowing by paying higher interests7. Higher interest rates in turn will surelytrigger a drop of government security prices, deteriorating values of financialassets among banks, producers and consumers. Devaluation of financial assetsthus set off may force some banks and producers to go bankrupt in due course.

Under such circumstances, government would be forced to bail out or intro-duce another stimulus packages, increasing deficit as flow and piling up debt asstock. This financial crisis loop will sooner or later lead our economy toward asecond impasse which is in this paper called financial meltdown, following [8].Recent financial crisis following the burst of housing bubbles, however, is noth-ing but a side attack in this financial crisis loop, though reinforcing the debtscrisis. Tougher financial regulations being considered in the aftermath of finan-cial crisis might reduce this side attack. Yet they do not vanquish the financialcrisis loop originating from the debts crisis loop in Figure 5.

Hyper-Inflation

To avoid higher interest rate caused in the debt crisis loop, central banks wouldbe forced to increase money supply, which inevitably leads to a third impasse ofhyper-inflation. Incidentally, this possibility of hyper-inflation in the US may beaugmented by the aftermath behaviors of the Fed following the Lehman Shockof 2008. In fact, monetary base or high-powered money doubled from $905billion, Sept. 3, 2008, to $1,801 billion, Sept. 2, 2009, within a year (FRB: H.3Release). Thanks to the drastic credit crunch, however, this doubling increasein monetary base didn’t trigger inflation so far. In other words, M1 consisting ofcurrency in circulation, traveler’s checks, demand deposits, and other checkabledeposits, only increased from $1,461 billion in Sept. 2008 to $1,665 billion inSept. 2009 (FRB: H.6 Release), which implies that money multiplier droppedfrom 1.61 to 0.92. As of Feb. 2011, it is 0.91. In short, traditional monetaryexpansion policy by the Fed didn’t work to restore the US economy so far. Yet,these tremendous increase in monetary base will, as a monetary bomb, force theUS dollars to be devalued sooner or later. Once it gets burst, hyper-inflationwill attack world economy in the foreseeable future. One of the main subject ofG20 meetings last year in Seoul, Korea was how to avoid currency wars beingled by the devaluation of dollar.

As discussed above in this way, current economies built on a debt moneysystem seems to be getting trapped into one of three impasses, and governmentmay be eventually destined to collapse due to a heavy burden of debts. Theseare hotly debated scenarios about the consequences of the rapidly accumulatingdebt in Japan, whose debt-GDP ratio in 2009 was 196.4% as observed above; thehighest among OECD countries! Greece has almost experienced this impasse in2009.

7This feedback loop from the accumulating debt to the higher interest rate is not yet fullyincorporated in our model below.

10

Page 11: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

After all, current macroeconomic system has been structurally fabricated bythe Keynesian macroeconomic policy framework in which it is proposed thatthe additional government expenditure can rescue the troubled economy fromrecession. Yet, it fails to analyze why this fiscal policy is destined to accumulategovernment debt as mentioned above. In fact, even though GDP gap is very hugein Japan, yet due to the fear of runaway accumulation of debt, the Japanesegovernment is very reluctant to stimulate the economy and, in this sense, itseems to have totally lost its discretion of public policies for the welfare ofpeople even though production capacities and workers have been sitting idleand ready to be called in service. In other words, Keynesian fiscal policy cannotbe applied to the troubled Keynesian macroeconomy. With zero interest rate,its monetary policy has already lost its discretion as well. Isn’t this an irony ofthe Keynesian theory? Current debt money system of macroeconomy seems tohave fallen into the dead-end trap.

With these preparatory analysis of the current economic situations in mind,we are now in a position to expand our previous model to a complete model ofopen macaroeconomies, and examine how government debt can be liquidatedunder two different money systems; that is, debt money system and publicmoney system.

3 Modeling A Debt Money System

Since 2004 I have been working step-by-step on constructing macroeconomicmodels in [10], [11], [12] and [13] based on the method of accounting system dy-namics developed in [9]. This series of macroeconomic modeling was completedin [14] with a follow-up analytical refinement method of price adjustment mech-anism in [15]. The model of open macroeconomies in this paper is mostly basedon the model in [14].

For the convenience of the reader, main transactions of the open macroe-conomies by producers, consumers, government, banks and the central bank arereplicated here. In addition, only the domestic models of open macroeconomiesas well as foreign exchange and balance of payment are supplemented to theappendix of this paper.

Producers

Main transactions of producers, which are illustrated in Figure 32 in the ap-pendix, are summarized as follows.

• Out of the GDP revenues producers pay excise tax, deduct the amount ofdepreciation, and pay wages to workers (consumers) and interests to thebanks. The remaining revenues become profits before tax.

• They pay corporate tax to the government out of the profits before tax.

11

Page 12: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

• The remaining profits after tax are paid to the owners (that is, consumers)as dividends, including dividends abroad. However, a small portion ofprofits is allowed to be held as retained earnings.

• Producers are thus constantly in a state of cash flow deficits. To makenew investment, therefore, they have to borrow money from banks andpay interest to the banks.

• Producers imports goods and services according to their economic activi-ties, the amount of which is assumed to be a portion of GDP in our model,though actual imports are also assumed to be affected by their demandcurves.

• Similarly, their exports are determined by the economic activities of aforeign economy, the amount of which is also assumed to be a portion offoreign GDP.

• Produces are also allowed to make direct investment abroad as a portionof their investment. Investment income from these investment abroad arepaid by foreign producers as dividends directly to consumers as ownersof assets abroad. Meanwhile, producers are required to pay foreign in-vestment income (returns) as dividends to foreign investors (consumers)according to their foreign financial liabilities.

• Foreign producers are assumed to behave in a similar fashion as a mirrorimage of domestic producers

Consumers

Main transactions of consumers, which are illustrated in Figure 33 in the ap-pendix, are summarized as follows.

• Sources of consumers’ income are their labor supply, financial assets theyhold such as bank deposits, shares (including direct assets abroad), anddeposits abroad. Hence, consumers receive wages and dividends fromproducers, interest from banks and government, and direct and financialinvestment income from abroad.

• Financial assets of consumers consist of bank deposits and governmentsecurities, against which they receive financial income of interests frombanks and government.

• In addition to the income such as wages, interests, and dividends, con-sumers receive cash whenever previous securities are partly redeemed an-nually by the government.

• Out of these cash income as a whole, consumers pay income taxes, andthe remaining income becomes their disposal income.

12

Page 13: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

• Out of their disposable income, they spend on consumption. The remain-ing amount is either spent to purchase government securities or saved.

• Consumers are now allowed to make financial investment abroad out oftheir financial assets consisting of stocks, bonds and cash. For simplicity,however, their financial investment are assumed to be a portion out oftheir deposits . Hence, returns from financial investment are uniformlyevaluated in terms of deposit returns.

• Consumers now receive direct and financial investment income. Similarinvestment income are paid to foreign investors by producers and banks.The difference between receipt and payment of those investment incomeis called income balance. When this amount is added to the GDP rev-enues, GNP (Gross National Product) is calculated. If capital depreciationis further deducted, the remaining amount is called NNP (Net NationalProduct).

• NNP thus obtained is completely paid out to consumers, consisting ofworkers and shareholders, as wages to workers and dividends to share-holders, including foreign shareholders.

• Foreign consumers are assumed to behave in a similar fashion as a mirrorimage of domestic consumers.

Government

Transactions of the government are illustrated in Figure 34 in the appendix,some of which are summarized as follows.

• Government receives, as tax revenues, income taxes from consumers andcorporate taxes from producers.

• Government spending consists of government expenditures and paymentsto the consumers for its partial debt redemption and interests against itssecurities.

• Government expenditures are assumed to be endogenously determinedby either the growth-dependent expenditures or tax revenue-dependentexpenditures.

• If spending exceeds tax revenues, government has to borrow cash fromconsumers and banks by newly issuing government securities.

• Foreign government is assumed to behave in a similar fashion as a mirrorimage of domestic government.

13

Page 14: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Banks

Main transactions of banks, which are illustrated in Figure 35 in the appendix,are summarized as follows.

• Banks receive deposits from consumers and consumers abroad as foreigninvestors, against which they pay interests.

• They are obliged to deposit a portion of the deposits as the requiredreserves with the central bank.

• Out of the remaining deposits, loans are made to producers and banksreceive interests to which a prime rate is applied.

• If loanable fund is not enough, banks can borrow from the central bankto which discount rate is applied.

• Their retained earnings thus become interest receipts from producers lessinterest payment to consumers and to the central bank. Positive earningswill be distributed among bank workers as consumers.

• Banks buy and sell foreign exchange at the request of producers, con-sumers and the central bank.

• Their foreign exchange are held as bank reserves and evaluated in termsof book value. In other words, foreign exchange reserves are not depositedwith foreign banks. Thus net gains realized by the changes in foreignexchange rate become part of their retained earnings (or losses).

• Foreign currency (dollars in our model) is assumed to play a role of keycurrency or vehicle currency. Accordingly foreign banks need not set upforeign exchange account. This is a point where a mirror image of openmacroeconomic symmetry breaks down.

Central Bank

Main transactions of the central bank, which are illustrated in Figure 36 in theappendix, are summarized as follows.

• The central bank issues currencies against the gold deposited by the public.

• It can also issue currency by accepting government securities through openmarket operation, specifically by purchasing government securities fromthe public (consumers) and banks. Moreover, it can issue currency bymaking credit loans to commercial banks. (These activities are sometimescalled money out of nothing.)

• It can similarly withdraw currencies by selling government securities to thepublic (consumers) and banks, and through debt redemption by banks.

14

Page 15: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

• Banks are required by law to reserve a certain amount of deposits withthe central bank. By controlling this required reserve ratio, the centralbank can control the monetary base directly.

• The central bank can additionally control the amount of money supplythrough monetary policies such as open market operations and discountrate.

• Another powerful but hidden control method is through its direct influenceover the amount of credit loans to banks (known as window guidance inJapan.)

• The central bank is allowed to intervene foreign exchange market; that is,it can buy and sell foreign exchange to keep a foreign exchange ratio stable(though this intervention is actually exerted by the Ministry of Finance inJapan, it is regarded as a part of policy by the central bank in our model).

• Foreign exchange reserves held by the central bank is usually reinvestedwith foreign deposits and foreign government securities, which are, how-ever, not assumed here as inessential.

4 Behaviors of A Debt Money System

Mostly Equilibria in the Real Sector

Our open macroeconomic model is now completely presented. It is a genericmodel, out of which diverse macroeconomic behaviors are generated, dependingon the purpose of simulations. In this paper let us focus on an equilibriumgrowth path as a benchmark for our analysis to follow. An equilibrium state iscalled a full capacity aggregate demand equilibrium if the following three outputand demand levels are met:

Full Capacity GDP = Desired Output = Aggregate Demand (4)

If the economy is not in the equilibrium state, then actual GDP is determinedby

GDP = MIN (Full Capacity GDP, Desired Output ) (5)

In other words, if desired output is greater than full capacity GDP, then actualGDP is constrained by the production capacity, meanwhile in the opposite case,GDP is determined by the amount of desired output which producers wish toproduce, leaving the capacity idle, and workers being laid off.

Even though full capacity GDP is attained, full employment may not berealized unless the following equation is not met;

Potential GDP = Full Capacity GDP. (6)

15

Page 16: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Does the equilibrium state, then, exist in the sense of full capacity GDP and fullemployment? To answer these questions, let us define GDP gap as a differencebetween potential GDP and actual GDP, and its ratio to the potential GDP as

GDP Gap Ratio =Potential GDP - GDP

Potential GDP(7)

By trial and error, mostly equilibrium states are attained when price elastic-ity e is 3, together with all other adjusted parameters, as illustrated in Figure6.

600

450

300

150

0

5 5 5 5 5 5 5 5

4 4 4 4 4 4 4 4 4

33 3

33

33

33

22

22

22

22

2

11

11

11

11

1

0 5 10 15 20 25 30 35 40 45 50

Time (Year)1 1 1 1 1 12 2 2 2 2 2

3 3 3 3 34 4 4 4 4 45 5 5 5 5 5

Figure 6: Mostly Equilibrium States

Our open macrodynamic model has more than 900 variables that are in-terrelated one another, among which, as benchmark variables for comparativeanalyses in this paper, we mainly focus on two variables: GDP gap ratio andunemployment rate. Figure 7 illustrates these two figures at the mostly equi-librium states. GDP gap ratios are maintained below 1% after the year 6, andunemployment ratios are less than 0.4% at their highest around the year 6, ap-proaching to zero; that is, full employment. The reader may wonder why theseare a state of mostly equilibria, because some fluctuations are being observed.Economic activities are alive like human bodies, whose heart pulse rates, evenof healthy persons, fluctuate between 60 and 70 per minute in average. Yet,they are a normal state. In a similar fashion, it is reasonable to consider thesefluctuations as normal equilibrium states.

Money out of Nothing

For the attainment of mostly equilibria, enough amount of money has to beput into circulation to avoid recessions caused by credit crunch as analyzed in

16

Page 17: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

GDP Gap Ratio

0.02

0.015

0.01

0.005

0

2

2

22 2 2 2

2

2

2

2

22 21

1

11

1

1 11

11

11

1

1

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Dm

nl

GDP Gap Ratio : Current 1 1 1 1 1 1 1 1

GDP Gap Ratio : Equilibrium (Debt) 2 2 2 2 2 2

Unemployment rate

0.004

0.003

0.002

0.001

02 2

2

2 2 2 2 2 2 2 2 2 2 21 1

1

11 1 1 1 1 1 1 1 1 1

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Dm

nl

Unemployment rate : Current 1 1 1 1 1 1 1 1 1 1Unemployment rate : Equilibrium (Debt) 2 2 2 2 2 2 2

Figure 7: GDP Gap and Unemployment Rate of Mostly Equilibrium States

[12]. Demand for money mainly comes from banks and producers. Banks areassumed to make loans to producers as much as desired so long as their vaultcash is available. Thus, they are persistently in a state of shortage of cash aswell as producers. In the case of producers, they could borrow enough fund frombanks. From whom, then, should the banks borrow in case of cash shortage?

In a closed economic system, money has to be issued or created within thesystem. Under the current financial system of debt money, only the central bankis endowed with a power to issue money within the system, and make loansto the commercial banks directly and to the government indirectly throughthe open market operations. Commercial banks then create credits under afractional reserve banking system by making loans to producers and consumers.These credits constitute a great portion of money supply. In this way, moneyand credits are only crated when commercial banks and government as well asproducers and consumers come to borrow at interest. Under such circumstances,if all debts are repaid, money ceases to exit. This is an essence of a debt moneysystem. The process of creating money is known as money out of nothing.

Figure 8 indicates unconditional amount of annual discount loans and itsgrowth rate by the central bank at the request of desired borrowing by banks.In other words, money has to be incessantly created and put into circulation inorder to sustain an economic growth under mostly equilibrium states. Roughlyspeaking, a growth rate of credit creation by the central bank has to be inaverage equal to or slightly greater than the economic growth rate as suggestedby the right hand diagram of Figure 8, in which line 1 is a growth rate of creditand line 2 is an economic growth rate. In this way, the central bank begins toexert an enormous power over the economy through its credit control.

Accumulation of Government Debt

So long as the mostly equilibria are realized in the economy, through monetaryand fiscal policies in the days of recession, no macroeconomic problem seemsto exist. This is a positive side of the Keynesian macroeconomic theory. Yetbehind the full capacity aggregate demand growth path in Figure 6 govern-ment debt continues to accumulate as the line 1 in the left diagram of Figure 9illustrates. This is a negative side of the Keynesian theory. Yet most macroe-

17

Page 18: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Lending (Central Bank)

200

150

100

50

00 5 10 15 20 25 30 35 40 45 50

Time (Year)

Yen

/Yea

r

"Lending (Central Bank)" : Equilibrium (Debt)

0.4

0.2

0

-0.2

-0.4

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

11

1

1

1

1

1

1

1

1

11

1 1

1

0 5 10 15 20 25 30 35 40 45 50

Time (Year)1 1 1 1 1 1 1 1 1

2 2 2 2 2 2 2 2 2 2 2

Figure 8: Lending by the Central Bank and its Growth Rate

conomic textbooks neglect or less emphasize this negative side, partly becausetheir macroeconomic frameworks cannot handle this negative side of the debtmoney system.

In the model here primary balance ratio is initially set to be one and balancedbudget is assumed; that is, government expenditure is set to be equal to taxrevenues, and no deficit arises. Why, then, does the government continue toaccumulate debt? Government deficit is precisely defined as

Debt (Government)

800

600

400

200

0

22 2 2 2 2 2 2 2 2 2 2 2 2

1 11

11

11

1

11

11

1

1

1

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Yen

"Debt (Government)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1 1"Debt (Government)" : Primary Balance(=91%) 2 2 2 2 2 2 2 2 2

Debt-GDP ratio

2

1.5

1

0.5

0

2 2 2 2 2 2 2 2 2 2 2 2 2 21

11

11

11

11

11

11

11

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Year

"Debt-GDP ratio" : Equilibrium (Debt) 1 1 1 1 1 1 1"Debt-GDP ratio" : Primary Balance(=91%) 2 2 2 2 2 2

Figure 9: Accumulation of Government Debt and Debt-GDP Ratio

Deficit = Tax Revenues - Expenditure - Debt Redemption - Interest (8)

Therefore, even if balanced budget is maintained, government still has to keeppaying its debt redemption and interest. This is why it has to keep borrowingand accumulating its debt. Initial GDP in the model is attained to be 300, whilegovernment debt is initially set to be 200. Hence, the initial debt-GDP ratiois around 0.667 year. Yet, the ratio continues to increase to 1.585 year at theyear 50 in the model as illustrated by the line 1 in the right diagram of Figure9. This implies the government debt becomes 1.585 years as high as the annuallevel of GDP.

Remarks: Even if the scenario of debt crisis due to the runaway accumula-tion of debt fails to be observed in the near future, still there exit some ethicalreasons to stop accumulating debts. First, it continues to create unfair income

18

Page 19: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

distribution in favor of creditors, that is, bankers and financial elite, causinginefficient allocation of resources and economic performances, and eventuallysocial turmoils among the poor. Second, obligatory payment of interest forcesthe indebted producers to continue incessant economic growth to the limit ofenvironmental carrying capacity, which eventually leads to the collapse of envi-ronment. In short, a debt money system is unsustainable as a macroeconomicsystem.

Liquidation of Government Debt

Let us now consider how we could avoid such a financial crisis and collapse. Atthe face of the financial crisis as discussed above, suppose that government isforced to reduce its debt-GDP ratio to less than 0.6 by the year 50, as currentlyrequired to all EU members by the Maastricht treaty. To attain this goal, aprimary balance ratio has to be reduced to 0.91 in our economy. In other words,the government has to make a strong commitment to repay its debt annually bythe amount of 9 % of its tax revenues. Let us assume that this reduction is putinto action at the year 6. Under such a radical financial reform, as illustratedby the line 2 in the right diagram of Figure 9, debt-GDP ratio will begin toget reduced to around 0.615, and the accumulation of debt will be eventuallycurved (line 2 in the left diagram).

GDP (real)

400

362.60

325.19

287.79

250.38

2 2

22

2 22

22

22

22

2

1 1

1 1

11

1 11

11

11 1

0 5 10 15 20 25Time (Year)

Yen

Rea

l/Y

ear

"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1

"GDP (real)" : Primary Balance(=91%) 2 2 2 2 2 2

Figure 10: Recessions triggered by Debt Liquidation

Even so, this radical financial reform becomes very costly to the governmentand its people as well. At the next year of the implementation of 9 % reductionof a primary balance ratio, growth rate is forced to drop to minus 2 %, and theeconomy fails to sustain its full capacity aggregate demand equilibrium of line 1

19

Page 20: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

as illustrated by the line 2 in Figure 10. Compared with the mostly equilibriumpath of line 1, debt-reducing path of line 2 brings about business cycles.

Figure 11 (lines 2) shows how this policy of debt liquidation triggers GDPgap and unemployment. GDP gap jumps from 0.7% to 3.9% at the year 7, morethan 5 times. Unemployment jumps from 0.35% to 3% at the year 7, more than8 times. In the previous paper [16], unemployment was left unanalyzed. In thissense, this result is a new finding on the effect of debt liquidation under thecurrent debt money system. The reader should understand that the absolutenumber is not essential here, because our analysis is based on arbitrary numericalvalues. Instead, comparative changes in factors need be paid more attention.

GDP Gap Ratio

0.04

0.03

0.02

0.01

02

2

2

22

2

2 2

2

2

2

2

2

21

1

1

1

1 1 1 11

1

1

1

1

1

1

0 5 10 15 20 25Time (Year)

Dm

nl

GDP Gap Ratio : Equilibrium (Debt) 1 1 1 1 1 1 1 1GDP Gap Ratio : Primary Balance(=91%) 2 2 2 2 2 2 2

Unemployment rate

0.04

0.03

0.02

0.01

02 2 2

2

2

2

2

22

2 2 2 2 21 1 11 1

1 1 1 1 1 1 1 1 1 10 5 10 15 20 25

Time (Year)

Dm

nl

Unemployment rate : Equilibrium (Debt) 1 1 1 1 1 1 1Unemployment rate : Primary Balance(=91%) 2 2 2 2 2 2

Figure 11: GDP Gap and Unemployment

Figure 12 illustrates how fast wage rate plummets (line 2 in the left diagram)- another finding in this paper. Concurrently inflation rate plunges to -1% from-0.26%, close to 4 times drop, that is, the economy becomes deflationary (line2 in the right diagram).

Wage Rate

2.252

2.190

2.128

2.066

2.004

2

2

2

22

2

2

2 22

22

22

1

11

1 11 1

1 11 1 1

11

0 5 10 15 20 25Time (Year)

Yen

/(Y

ear*

Per

son)

Wage Rate : Equilibrium (Debt) 1 1 1 1 1 1 1

Wage Rate : Primary Balance(=91%) 2 2 2 2 2 2

Inflation Rate

0.01

0.005

0

-0.005

-0.01

2

2

2

2

2

2

2

2

2

2

2

2

2

2

1

1

11

1 1

1 1

1

1

1

11

1

0 5 10 15 20 25Time (Year)

1/Y

ear

Inflation Rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1Inflation Rate : Primary Balance(=91%) 2 2 2 2 2 2 2

Figure 12: Wage Rate and Inflation

These recessionary effects caused by the liquidation of debt turn out to crossover a national border and become contagious to foreign countries. Figure 13illustrates how GDP gap and unemployment in a foreign country get worsenedby our domestic liquidation policy of debt (lines 2). These contagious effectsunder open macroeconomies are observed for the first time in our expandedmacroeconomic model - our third finding in this paper. In this sense, in a global

20

Page 21: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

world economy, no country can be free from a contagious effect of recessionscaused by the debt liquidation policy in other country.

GDP Gap Ratio.f

0.02

0.015

0.01

0.005

0 2

2

2

2

2

2

2

2

2

2

2

2

2

21

1

1

1

1

1

1 11

1

1

1

1

1

0 5 10 15 20 25Time (Year)

Dm

nl

"GDP Gap Ratio.f" : Equilibrium (Debt) 1 1 1 1 1 1 1"GDP Gap Ratio.f" : Primary Balance(=91%) 2 2 2 2 2 2

Unemployment rate.f

0.01

0.0075

0.005

0.0025

02 2 2

2

2

2

2

2

2

2

2

2 221 1 1

11

1

1 1 1 1 1 1 1 10 5 10 15 20 25

Time (Year)

Dm

nl

"Unemployment rate.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1 1"Unemployment rate.f" : Primary Balance(=91%) 2 2 2 2 2 2 2 2 2

Figure 13: Foreign Recessions Contagiously Triggered

A Liquidation Trap of Government Debt

Under a debt money system, liquidation policy of government dept will beeventually captured into a liquidation trap as follows. The liquidation policy isonly implemented with the reduction of budget deficit by spending less or levyingtax. Whichever way is taken, it may cause an economic recession as analyzedabove. The recession thus triggered reduces tax revenues as illustrated in theleft-hand diagram of Figure 14 (line 2)), which will worsen budget deficit asillustrated in the right-hand diagram as a revenues crisis loop. Or governmentis forced to make bailout/stimulus package, increasing expenditures again andworsening deficit as illustrated as a spending crisis loop, though the loop is notfully reflected in our model. In this way the liquidation policy of governmentdebt as discussed above is retarded by two balancing feedback loops of revenuescrisis and spending crisis, making up a liquidation trap of government debt. Thisindicates that the debt money system combined with the traditional Keynesianfiscal policy becomes an dead end as a macroeconomic monetary system.

Tax Revenues

66.56

62.44

58.32

54.20

50.08

2 2

22

2 2

2 2

2 2 2

2 2

2

11

1 1

1

11

1

1

11

11

1

0 5 10 15 20 25Time (Year)

Yen

/Yea

r

Tax Revenues : Equilibrium (Debt) 1 1 1 1 1 1

Tax Revenues : Primary Balance(=91%) 2 2 2 2 2 2

Budget

Deficit

Tax

Revenues

Government

Expenditures

Bailout /

Stimulus

Packages

Normal

Spending

Recession

Revenues CrisisSpending Crisis

Figure 14: A Liquidation Trap of Debt

21

Page 22: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

5 Modeling A Public Money System

We are now in a position to implement the alternative macroeconomic systemdiscussed in the introduction, as proposed by the American Monetary Act, inwhich central bank is incorporated into a branch of government and a fractionalreserve banking system is abolished. Let us call this new system a public moneysystem of open macroeconomies. Money issued under this new system plays arole of public utility of medium of exchange. Hence the newly incorporated in-stitution may be appropriately called the Public Money Administration (PMA)in this paper.

Under the new system, transactions of only government, commercial banksand the public money administration (formally the central bank) need be revisedslightly. Let us start with the description of the revised transactions of thegovernment.

Government

• Balanced budget is assumed to be maintained; that is, a primary balanceratio is unitary. Yet the government may still incur deficit due to the debtredemption and interest payment.

• Government now has the right to newly issue money whenever its deficitneeds to be funded. The newly issued money becomes seigniorage inflowof the government into its equity or retained earnings account.

• The newly issued money is simultaneously deposited with the reserve ac-count of the Public Money Administration. It is also booked to its depositsaccount of the government assets.

• Government could further issue money to fill in GDP gap.

Revised transaction of the government is illustrated in Figure 34 in the appendix,where green stock box of deposits is newly added to the assets.

Banks

Revised transactions of commercial banks are summarized as follows.

• Banks are now obliged to deposit a 100% fraction of the deposits as therequired reserves with the public money administration. Time depositsare excluded from this obligation.

• When the amount of time deposits is not enough to meet the demandfor loans from producers, banks are allowed to borrow from the publicmoney administration free of interest; that is, former discount rate is nowzero. Allocation of loans to the banks will be prioritized according tothe public policies of the government. (This constitutes a market-orientedissue of new money. Alternatively, the government can also issue new

22

Page 23: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

money directly through its public policies to fill in GDP gap as alreadydiscussed above.)

Required Reserve Ratio

1

0.75

0.5

0.25

0 3 3 3

3 3 3 3 3 3 3 3 3 3 3

2 2 2

2

2

2

2

2 2 2 2 2 2 2

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Dm

nl

Required Reserve Ratio : Equilibrium(as Debt) 1 1 1 1 1 1 1 1 1Required Reserve Ratio : Debt-Free(Gradual Fraction) 2 2 2 2 2 2 2 2Required Reserve Ratio : Debt-Free(100% Fraction) 3 3 3 3 3 3 3 3

Figure 15: Required Reserve Ratios

Line 1 in Figure 15 illustrates theoriginal required reserve ratio of 5%in our model. We assume two dif-ferent ways of abolishing a fractionalreserve banking system. Line 2 showsthat a 100% fraction is gradually at-tained in 10 years at the year 25,starting from the year 10, meanwhileline 3 indicates that the 100% fractionis attained immediately at the year10.

Public Money Administra-tion (Formerly Central Bank)

The central bank is now incorporatedas one of the governmental organizations which is here called the Public MoneyAdministration (PMA). Its revised transactions become as follows.

• The PMA accepts newly issued money of the government as seigniorageassets and enter the same amount into the government reserve account.Under this transaction, the government needs not print hard currency,instead it only sends digital figures of the new money to the PMA.

• When the government want to withdraw money from their reserve ac-counts at the PMA, the PMA could issue new money according to therequested amount. In this way, for a time being, former central bank noteand government money coexist in the market.

• With the new issue of money the PMA meets the demand for money bycommercial banks, free of interest, according to the guideline set by thegovernment public policies.

Under the revised transactions, open market operations of sales and pur-chases of government securities become ineffective, simply because governmentdebt gradually diminishes to zero. Furthermore, discount loan is replaced withinterest-free loan. This lending procedure becomes a sort of open and publicwindow guidance, which once led to the rapid economic growth after world warII in Japan [7]. Accordingly, interest incomes from discount loans and govern-ment securities are reduced to be zero eventually. Transactions of the publicmoney administration are illustrated in Figure 36 in the appendix, where greenstock boxes of seigniorage assets and government reserves are newly added.

23

Page 24: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

6 Behaviors of A Public Money System

Liquidation of Government Debt

Under the public money system of open macroeconomies, the accumulated debtof the government gets gradually liquidated as demonstrated in Figure 16, whichis the same as Figure 9 except that lines 3 and 4 are added here. Recollect that

Debt (Government)

800

600

400

200

0

4

4

4

44 4 4 4 4 4

33

3

33 3 3 3 3 3 3

22 2 2 2 2 2 2 2 2 2

11

11

1

1

1

1

1

1

1

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Yen

"Debt (Government)" : Equilibrium (Debt) 1 1 1 1 1 1 1"Debt (Government)" : Primary Balance(=91%) 2 2 2 2 2 2 2"Debt (Government)" : Public Money (Gradual Fraction) 3 3 3 3 3"Debt (Government)" : Public Money (100% Fraction) 4 4 4 4 4 4

Debt-GDP ratio

2

1.5

1

0.5

0

4

4

4

44 4 4 4 4 4

3

3

3

33

3 3 3 3 3 3

22 2 2 2 2 2 2 2 2 2

11

11

11

11

1

11

0 5 10 15 20 25 30 35 40 45 50Time (Year)

Yea

r"Debt-GDP ratio" : Equilibrium (Debt) 1 1 1 1 1 1 1 1"Debt-GDP ratio" : Primary Balance(=91%) 2 2 2 2 2 2 2 2"Debt-GDP ratio" : Public Money (Gradual Fraction) 3 3 3 3 3 3"Debt-GDP ratio" : Public Money (100% Fraction) 4 4 4 4 4 4

Figure 16: Liquidation of Government Debt and Debt-GDP Ratio

line 1 is a benchmark debt of the mostly equilibria under the debt money system,while line 2 is the decreased debt when debt-ratio is reduced under the samesystem. Now newly added line 3 indicates that the government debt continuesto decline when a gradual fraction ratio is applied, while line 4 shows a reductionof the government debt when a 100% fraction is applied at the year 10. Bothlines coincide, meaning that the abolishment methods of a fractional level donot affect the liquidation of the government debt, because banks are allowed tofill in the enough amount of cash shortage by borrowing from the PMA in themodel.

Under the public money system, a higher GDP is attained, to our surprise,than the one under the debt money system as illustrated by lines 3 & 4 inFigure 17. Moreover, it shows that the gradual abolishment of a fractionalreserve banking system (line 3) attains a higher GDP than the one by a suddenabolishment of 100% fraction at the year 10 (line 4).

To observe these comparisons in detail, let us illustrate GDP gap ratios andunemployment rates in Figure 18 in which the same line numbers apply as in theabove figure. In either case of the abolishment methods, the public money sys-tem can be said to be a far better system than the current debt system becauseof the accomplishment of higher economic growth without unemployment.

Moreover, Figure 19 illustrates that wage rate as well as inflation rates ofline 3 and line 4 are closer to the rates of mostly equilibria. Accordingly, theliquidation of debt under the public money system can be said to be attainedwithout causing the reduction of wage rate and setting off inflation rate.

Furthermore, the liquidation of debt under the public money system is notcontagious to foreign countries as indicated by Figure 20. That is, GDP gap andunemployment in a foreign country (lines 3 and 4) remain close to its almost

24

Page 25: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

GDP (real)

365.76

349.32

332.88

316.44

300 4

44

4

4

4

4

4

4

4

3

3

3

3

3

3

3

3

3

3

2

2 2

22

2

2

2

2

2

1 1

1

1

1

1

1

1

1

1

1

0 5 10 15 20 25Time (Year)

Yen

Rea

l/Y

ear

"GDP (real)" : Equilibrium (Debt) 1 1 1 1 1 1 1 1"GDP (real)" : Primary Balance(=91%) 2 2 2 2 2 2 2 2"GDP (real)" : Public Money (Gradual Fraction) 3 3 3 3 3 3"GDP (real)" : Public Money (100% Fraction) 4 4 4 4 4 4 4

Figure 17: No Recessions Triggered by A Public Money System

GDP Gap Ratio

0.04

0.03

0.02

0.01

0

4

4

4

4 4

4 4 44

4

3

3

3

3 3 3 3

33 3

3

22

22

2

2

2

2 22

21

1

1

11

11

1 1

1

10 5 10 15 20 25

Time (Year)

Dm

nl

GDP Gap Ratio : Equilibrium (Debt) 1 1 1 1 1 1 1 1GDP Gap Ratio : Primary Balance(=91%) 2 2 2 2 2 2 2 2GDP Gap Ratio : Public Money (Gradual Fraction) 3 3 3 3 3 3GDP Gap Ratio : Public Money (100% Fraction) 4 4 4 4 4 4 4

Unemployment rate

0.04

0.03

0.02

0.01

04 4

4

4 4 4 4 4 4 43 33

3 3 3 3 3 3 3 32 22

2

2

22

2 2 2 21 1 11

1 1 1 1 1 1 10 5 10 15 20 25

Time (Year)

Dm

nl

Unemployment rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1Unemployment rate : Primary Balance(=91%) 2 2 2 2 2 2 2Unemployment rate : Public Money (Gradual Fraction) 3 3 3 3 3 3Unemployment rate : Public Money (100% Fraction) 4 4 4 4 4 4

Figure 18: GDP Gap and Unemployment

Wage Rate

2.25

2.189

2.129

2.068

2.008

4

4 44

4 4 4 4 44

33

33

33

33

33

2

22

2 22

2

2 2

22

1

1

1 11

1 11

11

1

0 5 10 15 20 25Time (Year)

Yen

/(Y

ear*

Per

son)

Wage Rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1Wage Rate : Primary Balance(=91%) 2 2 2 2 2 2 2 2Wage Rate : Public Money (Gradual Fraction) 3 3 3 3 3 3Wage Rate : Public Money (100% Fraction) 4 4 4 4 4 4 4

Inflation Rate

0.01

0.005

0

-0.005

-0.01

44

4

44

4 4 4 44

3

3

3

3

3

3 3

3 3 3

2

22

2

2

2

2

2 2

2

1

1

11 1

1

11 1 1

1

0 5 10 15 20 25Time (Year)

1/Y

ear

Inflation Rate : Equilibrium (Debt) 1 1 1 1 1 1 1 1Inflation Rate : Primary Balance(=91%) 2 2 2 2 2 2 2 2Inflation Rate : Public Money (Gradual Fraction) 3 3 3 3 3 3Inflation Rate : Public Money (100% Fraction) 4 4 4 4 4 4

Figure 19: Wage Rate and Inflation

equilibria states (lines 1).

25

Page 26: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

GDP Gap Ratio.f

0.02

0.015

0.01

0.005

0

4

4

4

4

4

4

4

4

44

3

3

3

3 3

3

3

33 3

2

2

2

2

2

2

2 22

2

21

1

1

1

1

11

1 1

1 1

0 5 10 15 20 25Time (Year)

Dm

nl

"GDP Gap Ratio.f" : Equilibrium (Debt) 1 1 1 1 1 1 1 1"GDP Gap Ratio.f" : Primary Balance(=91%) 2 2 2 2 2 2 2"GDP Gap Ratio.f" : Public Money (Gradual Fraction) 3 3 3 3 3 3"GDP Gap Ratio.f" : Public Money (100% Fraction) 4 4 4 4 4 4

Unemployment rate.f

0.01

0.0075

0.005

0.0025

04 4

4

44 4 4 4 4 43 3

3

3

3 3 3 3 3 32 2

2 2 2

2

2

2 2 2

1 1 1

1

1

1 1 1 1 1 10 5 10 15 20 25

Time (Year)

Dm

nl

"Unemployment rate.f" : Equilibrium (Debt) 1 1 1 1 1 1 1"Unemployment rate.f" : Primary Balance(=91%) 2 2 2 2 2 2 2"Unemployment rate.f" : Public Money (Gradual Fraction) 3 3 3 3 3"Unemployment rate.f" : Public Money (100% Fraction) 4 4 4 4 4 4

Figure 20: Foreign Recessions are Not Triggered

Debt Crises can be Subdued!

In sum, the pubic money system is, from the results of the above analyses,demonstrated as a superior alternative system for liquidating government debtin a sense that its implementation does not trigger recessions both in domesticand foreign economies, yet attains a higher economic growth. In other words,conceivable debt crises to be caused by the accumulation of government debtcan be thoroughly subdued without causing recessions, unemployment, inflation,and contagious recessions in a foreign economy.

7 Public Money Policies

The role of a newly established public money administration under a publicmoney system is to maintain a monetary value, similar to the role assigned tothe central banks under the debt money system. Keynesian monetary policyunder the debt money system controls money supply indirectly through the ma-nipulation of required reserve ratio, discount ratio, and open market operations.Accordingly its effect is after all limited, as demonstrated by a failure of con-trolling economic bubbles of Japan in 1980s and of the USA in mid 2000s bythe adjustment of the interest rates, specifically by zero interest rate policies,for stimulating the depressed economies in Japan and USA.

Compared with these ineffective Keynesian monetary and fiscal policies, pub-lic money policies we introduce here are simpler and more direct; that is, theyare made up of the management of the amount of public money in circula-tion through governmental spending and tax policies. Interest rate is no longerused by the public money administration as a policy instrument and left to bedetermined in the market.

More specifically, our public money policies consist of three balancing feed-back loops as shown in Figure 21. Anti-recession policy is taken in the case ofeconomic recession to fill in a GDP gap; that is, government spends more thantax revenues by newly issuing public money. On the other hand in the case ofinflationary state, anti-inflation policy of managing public money is conductedsuch that public money in circulation is sucked back by raising taxes or cutting

26

Page 27: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Inflation

Step down of

the PMA Head

Anti-Inflation Policy

Maximal

Inflation

Tolerable

Gap

Public

Money

Budgetary

RestructureStep Down

Potential

GDP GDP

GDPGap

Anti-Recession Policy

Figure 21: Public Money Policies

government spending. As a supplement to this policy in the case of an unusu-ally higher inflation rate overshooting a maximum tolerable level, a step downpolicy of budgetary restructure will be carried out so that a head of the publicmonetary administration is forced to resign for his or her mismanagement ofmonetary value.

Recession

Let us now examine in detail how anti-recession policy help restore the economy.For this purpose a recession or GDP gap is purposefully produced by changingthe value of Normal Inventory Coverage from 0.1 to 0.5 months and OutputRatio Elasticity (Effect on Price) from 3 to 1, as illustrated in the left-diagramof Figure 22. Under the situation GDP gap can shown to be be filled in by

400

362.5

325

287.5

250

2 2

22

2

2

2 22

22 2

2

2

11

11

1 11

11

11

11

1

1

0 5 10 15 20 25

Time (Year)

1 1 1 1 1 1 1 1

2 2 2 2 2 2 2 2 2

400

362.30

324.61

286.91

249.22

2 2

22

22

22 2

22

2

22

11

11

1 11

11

11

1

11

1

0 5 10 15 20 25

Time (Year)

1 1 1 1 1 1

2 2 2 2 2 2

Figure 22: GDP Gap and Public Money Policy

newly issuing pubic money of 5 at t=7 for 20 years as confirmed in the right-hand diagram. Furthermore, Figure 23 demonstrates how GDP gap ratio and

27

Page 28: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

unemployment rate indicated by lines 1 are recovered by this public moneypolicy as indicated by lines 2.

GDP Gap Ratio

0.06

0.045

0.03

0.015

02

2

2

2

2 2 2 2 2 2 2 2 2 21 1

1

1

1

1

11 1 1 1 1

1

10 5 10 15 20 25

Time (Year)

Dm

nl

GDP Gap Ratio : GDP Gap 1 1 1 1 1 1 1 1

GDP Gap Ratio : Public Money Policy 2 2 2 2 2 2

Unemployment rate

0.04

0.03

0.02

0.01

02 2

2

2

22 2 2 2 2 2 2 2 21 1

1

1

1

1

1

11 1 1 1

11 1

0 5 10 15 20 25Time (Year)

Dm

nl

Unemployment rate : GDP Gap 1 1 1 1 1 1 1 1 1 1Unemployment rate : Public Money Policy 2 2 2 2 2 2

Figure 23: GDP Gap and Unemployment Recovered

Inflation

So long as a GDP gap exists, an increase in the government expenditure byissuing new money only restore the equilibrium by stimulating the economicgrowth as analyzed above, but does not undoubtedly cause a price hike andinflation as illustrated in Figure 24 by lines 2 (in comparison of lines 1 of GDPgap).

Yet, inflation could occur if government happens to mismanage the amountof public money. To examine the case, let us take a benchmark equilibriumstate attained by the public money policy as above (lines 2), then assume thatthe government overly increases public money to 15 instead of 5 at t=7 for20 years in the above case. This corresponds to a continual inflow of moneyinto circulation. Under such situations, Figure 24 shows how price goes up andinflation rate jumps to 1.2% from the equilibrium 0.2%, 6 times hike, at theyear 9 (lines 3).

Price

1.052

1.036

1.020

1.003

0.9871

33 3 3

3

3

3

3

3 3 33

3

22

2 22

22

2

22 2 2 2 2

11

1 11

1

11 1 1

1 1 1 1

0 5 10 15 20 25Time (Year)

Yen

/Yen

Rea

l

Price : GDP Gap 1 1 1 1 1 1 1 1 1 1

Price : Public Money Policy 2 2 2 2 2 2 2 2

Price : Inflation 3 3 3 3 3 3 3 3 3 3 3

Inflation Rate

0.02

0.014

0.008

0.002

-0.004

3

33

3

3

3

3

3

33

33 32

2

2

2

2 2 22

22

2 2 2 21 1

1

1

1

1

1

11 1 1

1 1 1

0 5 10 15 20 25Time (Year)

1/Y

ear

Inflation Rate : GDP Gap 1 1 1 1 1 1 1 1

Inflation Rate : Public Money Policy 2 2 2 2 2 2

Inflation Rate : Inflation 3 3 3 3 3 3 3 3

Figure 24: Price and Inflation Rate

The inflation thus caused by the excessive supply of money also triggers aGDP gap of 3.4% at the year 12 (or -2.6% of economic growth or recession),

28

Page 29: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

and an unemployment rate of 3.1% at the year 13 as illustrated by lines 3 inFigure 25.

GDP Gap Ratio

0.06

0.045

0.03

0.015

03

3

3

3

3 3

3

3

3 3 3 3 3 32

2

2

2

2 2 2 2 2 2 2 2 2 21 1

1

1

1

1

11 1 1 1 1

1

10 5 10 15 20 25

Time (Year)

Dm

nl

GDP Gap Ratio : GDP Gap 1 1 1 1 1 1 1 1

GDP Gap Ratio : Public Money Policy 2 2 2 2 2 2

GDP Gap Ratio : Inflation 3 3 3 3 3 3 3 3 3

Unemployment rate

0.04

0.03

0.02

0.01

03

3

3

33

3

3

3

3

3 3 3 3 32 2

2

2

22 2 2 2 2 2 2 2 21 1

1

1

1

1

1

11 1 1 1

11 1

0 5 10 15 20 25Time (Year)

Dm

nl

Unemployment rate : GDP Gap 1 1 1 1 1 1 1 1 1 1Unemployment rate : Public Money Policy 2 2 2 2 2 2Unemployment rate : Inflation 3 3 3 3 3 3 3 3 3

Figure 25: GDP Gap and Unemployment

Persistent objection to the public money system has been that government,once a free-hand power of issuing money is being endowed, tends to issue moremoney than necessary, which tends to bring about inflation eventually, thoughhistory shows the opposite [17]. The above case could be unfortunately onesuch example. With the introduction of anti-inflationary policy, however, thistype of inflation can be easily curbed by the decrease in public money. Letus define maximal inflation as a maximum tolerable inflation rate set by thegovernment. For instance, it was set to be 8% in [16], as suggested by theAmerican Monetary Act. Then, anti-inflationary policy works such that if aninflation rate approaches to the maximal level and a tolerable gap decreases tozero, the amount of public money will be reduced to curb the inflation throughthe decrease in government spendings and/or the increase in taxes.

Step Down

What will happen if the tolerable gap becomes negative; that is, current in-flation rate becomes higher than the maximal inflation? This could occur, forinstance, when the incumbent government tries to cling to the power by unnec-essarily stimulating the economy in the years of election as history demonstrates.Business cycle thus spawned is called political business cycle. “There is someevidence that such a political business cycle exits in the United States, and theFederal Reserve under the control of Congress or the president might make thecycle even more pronounced [6, p.353].” Indeed Figure 26, obtained from theabove analysis of inflation, shows how business cycles could be caused by themismanagement of the increase in public money (line 3) when no GDP gap ex-ists (line 2). This could be a serious moral hazard lying under the public moneysystem.

Proponents of the central bank may take advantage of this cycle as an excusefor establishing the independence of the central bank from the intervention bythe government. How can we avoid the political business cycle, then, withoutresorting to the independence of the central bank? As a system dynamics re-searcher, I suggest an introduction of the third balancing feedback loop of Step

29

Page 30: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

GDP (real)

368.60

349.88

331.16

312.45

293.73

3

3

33

33 3

3

33

3

3

3

2 2

22

22

2

2

2

2

22

2

2

11

1

1

1

1

11

1

1

11

11

0 5 10 15 20 25Time (Year)

Yen

Rea

l/Y

ear

"GDP (real)" : GDP Gap 1 1 1 1 1 1 1 1 1

"GDP (real)" : Public Money Policy 2 2 2 2 2 2

"GDP (real)" : Inflation 3 3 3 3 3 3 3 3 3

Figure 26: Business Cycles caused by Inflation under No GDP Gap

Down as illustrated in Figure 21. This loop forces, by law, a head of the PublicMoney Administration to step down in case a tolerable gap becomes negative;that is, an inflation rate gets higher than its maximum tolerable rate. Then itforces a newly appointed head to restructure a budgetary spending policy tostabilize monetary value. The stability of a public money system depends onthe legalization of a forced step down of the head of the public money adminis-tration.

Conclusion

Money is, by Aristotle (384 - 322 BC), fiat money as legal tender and has beenhistorically created either as public money or debt money. Current macroe-conomies in many countries are built on a debt money system, which, however,failed to create enough amount of money to meet an increasing demand forgrowing transactions. Gold standard failed in 1930s and was replaced withgold-dollar standard after World War II, which alas failed in 1971. Then cur-rent dollar standard was established, allowing free hand of creating money bycentral banks, from which, unfortunately, current runaway government debt hasbeen derived. The accumulation of debt will sooner or later lead to impassesof defaults, meltdown or hyper-inflation; in other words it is facing a systemicfailure of the current debt money.

Under such circumstances it is shown that it becomes very costly to save thecurrent debt money system by reducing government debt and debt-GDP ratio;that is, a liquidation process of debt inevitably triggers economic recessions andunemployment of both domestic and foreign economies.

30

Page 31: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

An alternative system, then, is presented as a public money system of openmacroeconomies as proposed by the American Monetary Act in which onlygovernment can issue money with a full reserve banking system. It is shownthat under the public money system government debt can be liquidated withouttriggering recession and inflation. Additionally it is shown to attain a highereconomic growth and lower unemployment.

Finally, in place of the current Keynesian monetary and fiscal policies, publicmoney policies are introduced, consisting of three balancing feedback loops ofanti-recession policy, anti-inflation policy and restructuring policy of step downof a head of PMA (Public Money Administration). Public money policies thusbecome simpler and can affect directly to the workings of the economy.

Accordingly, from a viewpoint of system design, a public money system ofmacroeconomies as proposed by the American Monetary Act seems to be worthbeing implemented if we wish to avoid government debt crises as well as financialcrises8.

8This implementation might bring about fortunate by-products. A debt money system ofthe current macroeconomy has been pointed out to constitute a root cause of unfair incomedistribution between haves and haves-not, wars due to recessions, and environmental destruc-tion due to forced economic growth to pay for interest on debt. Accordingly, a public moneysystem remove the root cause of these problems and could be panacea for solving them. Dueto the limited space, further examination will be left to the reader

31

Page 32: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Appendix: MacroDynamics 2.4 Illustrated9

Ove

rvie

w

GD

P

Pro

duc

er

Cons

umer

Ban

ks

GD

P

Sim

ulat

ion

Inte

rest

, P

rice

& W

age

Gove

rnm

ent

Fis

cal P

olic

y

Mo

neta

ry

Polic

y

Pub

lic M

one

yA

dm

inis

trat

ion

(Cen

tral

Ban

k)

Pop

ulat

ion

Lab

or

Fo

rce

(C)

Pro

f. K

aoru

Ya

magu

chi,

Ph

.D.

Dosh

ish

a B

usi

nes

s S

cho

ol

Kyo

to, J

ap

an

Cur

renc

y

Cir

cula

tion

B/S

Che

ck

GD

P.f

Pro

duc

er.f

Co

nsum

er.f

Ban

ks.

f

GD

P

Sim

ulat

ion.

f

Inte

rest

, P

rice

& W

age.

f

Go

vern

men

t.f

Fis

cal P

olic

y.f

Mo

neta

ry

Po

licy.

f

Pub

lic M

one

yA

dm

inis

trat

ion.

f(C

entr

al B

ank.f

)

B/S

C

heck

.f

Popul

atio

n

Lab

or

Fo

rce.

f

Cur

renc

y

Cir

cula

tion.

f

Fore

ign

Exc

hang

e R

ate

Bal

ance

of

Pay

men

ts

Tra

de

& I

nves

tmen

t A

bro

ad

Sim

ulat

ion

Titl

e

Eco

nom

ic

Indic

ators

Eco

nom

ic

Indic

ators

.f

Macr

oec

on

om

ic D

yn

am

ics

Mod

el

of

A P

ub

lic

Mon

ey S

yst

em

- A

cco

un

tin

g S

yst

em D

yn

am

ics

Ap

pro

ach

-

Po

rf.

Ka

oru

Yam

ag

uch

i, P

h.D

.

Do

shis

ha

Busi

nes

s S

cho

ol

Dosh

isha

Univ

ersi

ty

Kyo

to,

Jap

an

[email protected]

(c)

All

Rig

hts

Rese

rved

, F

eb

. 2

01

1

< M

acr

oD

ynam

ics

2.4

>

Th

is m

od

el

pro

vid

es

a g

en

eri

c s

yst

em

on

wh

ich

va

rio

us

sch

oo

ls o

f eco

no

mic

th

ou

gh

ts c

an

be b

uil

t.

Yo

ur

co

mm

en

ts a

nd s

ug

gest

ion

s a

re m

ost

welc

om

e.

Figure 27: Title Page of the MacroDynamics Model

9In this illustrated section of the model, only domestic macroeconomy is presented. Themodel called MacroDynamics version 2.4 is available through the author.

32

Page 33: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Ove

rvie

w

GD

P

Pro

duc

er

Cons

umer

Ban

ks

GD

P

Sim

ulat

ion

Inte

rest

, P

rice

& W

age

Gove

rnm

ent

Fis

cal P

olic

y

Mo

neta

ry

Polic

y

Pub

lic M

one

yA

dm

inis

trat

ion

(Cen

tral

Ban

k)

Pop

ulat

ion

Lab

or

Fo

rce

(C)

Pro

f. K

aoru

Yam

agu

chi,

Ph

.D.

Do

shis

ha

Bu

sin

ess

Sch

ool

Kyo

to,

Ja

pa

n

Cur

renc

y

Cir

cula

tion

B/S

Che

ck

GD

P.f

Pro

duc

er.f

Co

nsum

er.f

Ban

ks.

f

GD

P

Sim

ulat

ion.

f

Inte

rest

, P

rice

& W

age.

f

Go

vern

men

t.f

Fis

cal P

olic

y.f

Mo

neta

ry

Polic

y.f

Pub

lic M

one

yA

dm

inis

trat

ion.

f(C

entr

al B

ank

.f)

B/S

C

heck

.f

Po

pul

atio

n

Lab

or

Fo

rce.

f

Cur

renc

y

Cir

cula

tion.

f

Fore

ign

Exc

hang

e R

ate

Bal

ance

of

Pay

men

ts

Tra

de

& I

nves

tmen

t A

bro

ad

Sim

ulat

ion

Titl

e

Eco

nom

ic

Indic

ato

rsE

cono

mic

Indic

ato

rs.f

Macro

econ

om

ic S

yst

em

Mo

deli

ng O

vervie

w

Co

nsu

mer

(Ho

use

ho

ld)

Pro

du

cer

(Fir

m)

Ba

nk

s

Pu

blic M

on

ey

Ad

min

istr

ati

on

Go

vern

men

t

Na

tio

nal

Wea

lth

(Cap

ita

lA

ccu

mu

lati

on

)

Gro

ssD

om

esti

cP

rod

uct

s(G

DP

)

Lab

or

& C

apita

l

Wag

es &

Div

iden

s (I

ncom

e)

Sav

ing

Loan

Inve

stm

ent

(PP

&E

)

Inve

stm

ent

(Hous

ing)

Inve

stm

ent

(Pub

lic

Fac

ilitie

s)

Inco

me

Tax

Co

rpo

rate

Tax

Co

nsum

ptio

n

Pub

lic S

ervi

ces

Pub

lic S

ervi

ces

Mo

ney

Sup

ply

Exp

ort

Impo

rt

Pro

duc

tion

Po

pu

lati

on

/ L

ab

or

Fo

rce

Ma

croecon

om

ic S

yst

em

Mod

eli

ng O

vervie

w (

Foreig

n C

ou

ntr

y)

Co

nsu

mer

(Ho

use

ho

ld).

f

Pro

du

cer

(Fir

m).

f

Ba

nk

s.f

Pu

blic M

on

ey

Ad

min

istr

ati

on

.f

Go

vern

men

t.f

Nati

on

al

Wea

lth

(Cap

ital

Acc

um

ula

tio

n)

Gro

ssD

om

esti

cP

rod

uct

s(G

DP

).f

Lab

or

& C

apita

l

Wag

es &

Div

iden

s (I

nco

me)

Sav

ing

Lo

an

Inve

stm

ent

(PP

&E

)

Inve

stm

ent

(Ho

usin

g)

Inve

stm

ent

(Pub

lic

Fac

ilitie

s)

Inco

me

Tax

Co

rpo

rate

Tax

Co

nsum

ptio

n

Pub

lic S

ervi

ces

Pub

lic S

ervi

ces

Mo

ney

Sup

ply

Pro

duc

tion

Po

pu

lati

on

/ L

ab

or

Fo

rce.f

Dir

ect

and F

inan

cial

Inve

stm

ent

Abro

ad

Figure 28: Model Overview

33

Page 34: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Pop

ulat

ion

0 T

o 1

4

dea

ths

15

to

44

initi

alpo

pul

atio

n0 t

o 1

4

Pop

ulat

ion

15

To 4

4

initi

alp

op

ulat

ion

15

to

44

Po

pul

atio

n

45

To

64

repro

duc

tive

lifet

ime

initi

alp

op

ulat

ion

45

to

64

Po

pul

atio

n

65

Plu

s

initi

alp

op

ulat

ion

65

plu

s

mat

urat

ion

44

to

45

mo

rtal

ity

0 t

o 1

4m

ort

ality

15

to

44

bir

ths

mat

urat

ion

14

to 1

5d

eath

s

0 t

o 1

4d

eath

s 45

to 6

4

dea

ths

65

plu

s

mort

ality

45

to

64

mort

ality

65 p

lus

Po

pul

atio

n

tota

l fer

tility

Po

pul

atio

n15

to

64

tota

l fer

tility

tab

le

Hig

h

Sch

ool

Colle

ge

Educ

atio

n

Vo

lunt

ary

Une

mp

loye

d

Em

plo

yed

Lab

or

Go

ing

to

Co

llege

Colle

ge

Gra

dua

tion

HS

Gra

dua

tion

New

Em

plo

ymen

t

colle

geat

tend

ance

ratio

Hig

hsc

hoo

ling

time

Colle

ge

scho

olin

g

time

Une

mp

loye

d

Lab

or

Net

Em

plo

ymen

t

lab

or

forc

e

par

ticip

atio

n ra

tio

Tim

e to

Adju

st

Lab

or

Lab

or

Fo

rcemat

urat

ion

64

to

65

Ret

ired

(Vo

lunt

ary)

<D

esir

ed

Out

put

(rea

l)>

Des

ired

Lab

or

<P

rice

>

<E

xcis

e T

ax

Rat

e>

<E

xpo

nent

on

Lab

or>

Une

mp

loy

men

t ra

te

To

tal

Gra

dua

tion

Ret

ired

(Em

plo

yed

)

New

Une

mp

loym

ent

Pro

duc

tive

Pop

ulat

ion

<H

igh

Sch

ool> <

Co

llege

Ed

ucat

ion>

<V

olu

ntar

y

Une

mplo

yed

>

<L

abo

r F

orc

e>

Po

rtio

n to

15

to

44

initi

al

pop

ulat

ion

15

to

64

Initi

ally

Em

plo

yed

Lab

or

Initi

ally

Une

mp

loye

dL

abo

r

<E

xpec

ted

Wag

e

Rat

e>

<G

DP

Gap

Rat

io>

Lab

or

Mar

ket

Fle

xib

ility

Figure 29: Population and Labor Force

34

Page 35: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Agg

rega

te

Dem

and (

real

)

Agg

rega

te

Dem

and

Fo

reca

stin

gC

hang

e in

AD

Fore

cast

ing

Tim

e to

Adju

st

Fore

cast

ing

Des

ired

Inv

ento

ry

Des

ired

Inv

ento

ry

Inve

stm

ent

Tim

e to

Adju

st

Inve

ntory

Initi

alP

ote

ntia

lG

DP

Cons

umptio

n

Go

vern

men

t

Exp

enditu

re

Cap

ital (

PP

& E

)

(rea

l)D

epre

ciat

ion

(rea

l)

Dep

reci

atio

n R

ate

Ful

l Cap

acity

GD

P

Gro

wth

Rat

e

Pro

duc

tion(

-1)

Gro

wth

Uni

t

<P

rice

>

Gove

rnm

ent

Exp

enditu

re (

real

)

<P

rice

>

Inve

ntory

(re

al)

GD

P (

real

)

<G

DP

(re

al)>

Gro

wth

Rat

e (%

)

Gro

wth

Co

vert

ion

to %

Cons

umptio

n

(rea

l)

Norm

al I

nven

tory

Cove

rage

Des

ired

Out

put

(rea

l)

Inve

nto

ryIn

vest

men

t(r

eal)

Gro

ss D

om

estic

Exp

enditu

re (

real

)

Des

ired

Cap

ital

(rea

l)

Exp

one

nt

on

Cap

ital

Tim

e to

Adju

st

Cap

ital

Exp

one

nt

on

Lab

or

Initi

alC

apita

l(r

eal)

Agg

rega

teD

eman

dF

ore

cast

ing

(Long

-run

)Cha

nge

in A

D

Fore

cast

ing

(Long

-run

)

Tim

e to

Adju

st

Fore

cast

ing

(Long

-run

)

Cap

ital-

Out

put

Rat

io

Long

-run

Pro

duc

tion

Gap

<F

ull C

apac

ity

GD

P>

<In

tere

st R

ate>

GD

P G

ap

Rat

io

<E

xcis

e T

ax

Rat

e>

Inve

stm

ent

(rea

l)

<In

vest

men

t

(rea

l)>

Net

Inv

estm

ent

(rea

l)

Des

ired

Cap

ital-

Out

put

Rat

io

<C

apita

l-O

utput

Rat

io>

<E

mplo

yed

Lab

or>

Tec

hno

logi

cal

Cha

nge

Po

tent

ial

GD

P

<L

abo

r F

orc

e>

Initi

al

Lab

or

Fo

rce

Sal

es (

real

)

Cap

ital u

nder

Cons

truc

tion

Cap

ital

Com

ple

tion

Cons

truc

tion

Per

iod

Inte

rest

Sen

sitiv

ity

Des

ired

Inve

stm

ent

(rea

l)

<In

vest

men

t><

Pri

ce>

<G

DP

(re

al)>

<In

itial

Cap

ital

(rea

l)>

<E

ffec

t on

Cons

ump

tion>

Exp

ort

s (r

eal)

<Im

port

s (r

eal)

.f>

<R

eal F

ore

ign

Exc

hang

e R

ate>

<Im

port

s (r

eal)

>N

et E

xport

s

(rea

l)

<P

ublic

Mone

y

Exp

enditu

re>

Figure 30: GDP Determination

35

Page 36: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Inte

rest

Rat

e

Cha

nge

in I

nter

est

Rat

e

Dem

and fo

rM

one

y(r

eal)

Mo

ney

Sup

ply

Del

ay T

ime

of In

tere

stR

ate

Cha

nge

Pri

ce

Cha

nge

in P

rice

Del

ay T

ime

of

Pri

ce C

hang

e

Initi

al P

rice

leve

l

<C

ash

(Cons

umer

)>

<C

ash

(Pro

duc

er)>

<C

ash

(Gove

rnm

ent)

>

Infla

tion

Rat

e

Pri

ce (

-1)

Inte

rest

Rat

e

(no

min

al)

<D

epo

sits

(B

anks)

>

Initi

alIn

tere

stR

ate

Cur

renc

y in

Cir

cula

tion

<D

esir

ed

Out

put

(re

al)>

<In

flatio

n R

ate>

Vel

oci

ty o

f

Mone

y

Sup

ply

of

Mone

y(r

eal)

Dem

and f

or

Mone

y

Dem

and f

or

Mone

y by

Pro

duc

ers

Dem

and f

or

Mone

y by

Co

nsum

ers

Dem

and f

or

Mone

y by

the

Gove

rnm

ent

<In

tere

st p

aid b

y P

rod

ucer

>

<D

ivid

ends>

<In

com

e T

ax>

<C

ons

umptio

n>

<G

ove

rnm

ent

Deb

t

Red

emptio

n><

Inte

rest

pai

d b

y th

eG

ove

rnm

ent>

<G

ove

rnm

ent

Exp

enditu

re>

Act

ual

Vel

oci

ty o

fM

one

y

<P

aym

ent

by

Pro

duc

er>

Dem

and f

or

Mone

y by

Ban

ks

Exp

ecte

d

Wag

e R

ate

Wag

e R

ate

Cha

nge

in

Wag

e R

ate

Initi

al W

age

Rat

e

Del

ay T

ime

of

Wag

e C

hang

e

<D

esir

ed L

abo

r>

<L

abor

Forc

e>

Rea

l Wag

e

Rat

e

<C

ash

Dem

and>

<S

avin

g>

<D

esir

ed I

nves

tmen

t>

<D

isco

unt

Rat

e>

Wag

e R

ate

Cha

nge

Cost

-pus

h (W

age)

Co

effic

ient

Dis

cout

Rat

e

Cha

nge

Dis

coun

t R

ate

Cha

nge

Tim

e

<V

ault

Cas

h

(Ban

ks)

>

<C

ash

out

><

Sec

uriti

es p

urch

ased

by

Ban

ks>

<L

endin

g

(Ban

ks)

>

<P

aym

ent

by

Ban

ks>

<F

ore

ign

Exc

hang

e out

>

<F

ore

ign

Exc

hang

e S

ale>

Mone

yR

atio

Des

ired

Inte

rest

Rat

eE

ffec

t on

Inte

rest

Rat

e

Mo

ney

Rat

io E

last

icity

(Effec

t on

Inte

rest

Rat

e)

Out

put

Rat

io E

last

icity

(Effec

t on

Pri

ce)

<P

ote

ntia

l GD

P>

<In

vent

ory

(re

al)>

<D

esir

ed

Inve

ntory

>

Pro

duc

tion

Rat

io

Inve

ntory

Rat

io

Wei

ght

of

Inve

nto

ry R

atio

Effec

t o

nP

rice

Des

ired

Pri

ce

Lab

or

Rat

io

Eff

ect

on

Wag

eL

abo

r R

atio

Ela

stic

ity

(Eff

ect

on

Wag

e)

Des

ired

Wag

e

<N

et F

ore

ign

Exc

hang

e (B

ank

s)>

<F

ore

ign

Exc

hang

e

(Ban

ks)

>

Figure 31: Interest Rate, Price and Wage Rate

36

Page 37: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Inve

nto

ry

Cas

h (P

roduc

er)

Ret

aine

d E

arni

ngs

(Pro

duc

er)

GD

P (

Rev

enue

s)

Wag

es

Div

iden

ds

Pro

fits

bef

ore

Tax

<W

ages

>

<W

ages

>

Cas

h

Flo

w

<D

ivid

ends>

Cap

ital S

hare

sC

apita

l Sha

res

New

ly I

ssue

d

Deb

t (P

rod

ucer

)

Cas

h F

low

fro

m

Oper

atin

g A

ctiv

ities

Cas

h F

low

fro

m

Inve

stin

g A

ctiv

ities

Cas

h F

low

Def

icit

(Pro

duc

er)

New

Cap

ital

Sha

res

Dir

ect

Fin

anci

ng

Rat

io

<N

ew C

apita

l

Sha

res>

Cas

h F

low

fro

m

Fin

anci

ng A

ctiv

ities

<N

ew C

apita

l

Sha

res>

Op

erat

ing

Act

iviti

es

Inve

stin

g

Act

iviti

es

Fin

anci

ng

Act

iviti

es

<D

ivid

end

s>

Corp

ora

te

Tax

Rat

e

Pro

fits

Co

rpo

rate

Tax

<C

orp

ora

te T

ax>

<C

orp

ora

te T

ax>

<In

tere

st p

aid

by

Pro

duc

er>

<In

tere

st p

aid

by

Pro

duc

er>

<In

tere

st p

aid

by

Pro

duc

er>

<In

tere

st p

aid

by

Pro

duc

er>

Tax

on

Pro

duc

tion

Exc

ise

Tax

Rat

e

Cha

nge

in E

xcis

e R

ate

<T

ime

for

Fis

cal

Po

licy>

<T

ax o

n

Pro

duc

tion>

<T

ax o

n P

rod

uctio

n>

<P

rice

>

<G

DP

(Rev

enue

s)>

<G

DP

(re

al)>

Dom

estic

Sal

es

<D

om

estic

Sal

es>

Cap

ital (

PP

&E

)In

vest

men

tD

epre

ciat

ion

<D

epre

ciat

ion

(rea

l)>

<P

rice

>

<D

epre

ciat

ion>

<E

mp

loye

d

Lab

or>

Des

ired

Fin

anci

ng

Pay

men

t by

Pro

duc

er

Pro

duc

er D

ebt

Red

emp

tion

Pro

duc

er

Deb

t P

erio

d

<P

roduc

er D

ebt

Red

emptio

n>

<P

rod

ucer

Deb

t

Red

emptio

n>

<P

aym

ent

by

Pro

duc

er>

<P

roduc

er D

ebt

Red

emptio

n>

Div

iden

ds

Rat

io

<W

age

Rat

e>

Des

ired

Borr

ow

ing

(Pro

duc

er)

<D

esir

ed

Inve

stm

ent

(rea

l)> D

esir

ed

Inve

stm

ent

<D

esir

ed

Inve

stm

ent><

Len

din

g

(Ban

ks)

>

<L

endin

g

(Ban

ks)

>

<L

end

ing

(Ban

ks)

>

Impo

rts

Impo

rts

(rea

l)Im

po

rts

Coef

ficie

nt

<G

DP

(re

al)>

<F

ore

ign

Exc

hang

e R

ate>

<P

rice

.f>

<Im

port

s>

Dem

and

Index

for

Impo

rts

Impo

rts

Dem

and

Cur

ve

<In

itial

Fo

reig

n

Exc

hang

e R

ate>

Exp

ort

s

<P

rice

>

<E

xpo

rts

(rea

l)>

GN

P

<In

com

e B

alan

ce>

Dir

ect

Ass

ets

Abro

ad

Dir

ect

Inve

stm

ent

Ab

road

Dir

ect

Inve

stm

ent

Dir

ect

Inve

stm

ent

Rat

io

<D

irec

t In

vest

men

t

Ab

road

>

Dir

ect

Inve

stm

ent

Index

Dir

ect

Inve

stm

ent

Ind

ex T

able

<In

tere

st A

rbitr

age

Adju

sted

>

Cap

ital L

iab

ilitie

s

Ab

road

Fo

reig

n D

irec

t

Inve

stm

ent

Ab

road

<D

irec

t In

vest

men

t

Ab

road

.f>

<F

ore

ign

Exc

hang

e R

ate>

<P

rice

>

1

2

12

Pro

fits

for

Div

iden

ds

1

2

<D

ivid

end

s

Ab

road

.f>

Div

iden

ds

Abro

ad

<In

tere

st R

ate

(no

min

al)>

<D

ivid

end

s

Ab

road

>

Impo

rtpul

se

Imp

ort

time

Imp

ort

dur

atio

n

<C

ons

umptio

n>

<In

vest

men

t>

<G

ove

rnm

ent

Exp

end

iture

>

<F

ore

ign

Dir

ect

Inve

stm

ent

Ab

road

>

Figure 32: Transactions of Producers

37

Page 38: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Cas

h

(Cons

umer

)

Cons

umptio

n

Bas

ic

Co

nsum

ptio

n

Mar

gina

l Pro

pen

sity

to C

ons

ume

Dep

osi

ts

(Co

nsum

er)

Sav

ing

Sha

res

(hel

d b

y

Co

nsum

er)

Inco

me

Tax

Inco

me

Tax

Rat

e

Dis

posa

ble

Inco

me

Go

vern

men

t

Sec

uriti

es

(Co

nsum

er)

Sec

uriti

es p

urch

ased

by

Co

nsum

er

<G

ove

rnm

ent

Sec

uriti

es N

ewly

Issu

ed>

Inco

me

Dis

trib

utio

n

by

Pro

duc

ers

<C

orp

ora

te T

ax>

<W

ages

> <D

ivid

ends>

<In

tere

st p

aid

by

Pro

duc

er>

Dis

trib

uted

Inco

me

Lum

p-s

um T

axes

Gove

rnm

ent

Tra

nsfe

rs

Cha

nge

in

Lum

p-s

um T

axes

Co

nsum

er E

qui

ty

Inco

me

<W

ages

>

<D

ivid

end

s>

<In

com

e>

<D

ispo

sab

le

Inco

me>

<In

com

e>

Sec

uriti

es s

old

by

Co

nsum

er

<G

ove

rnm

ent

Deb

t

Red

emp

tion>

<S

ecur

ities

so

ld

by

Co

nsum

er>

Cha

nge

in I

nco

me

Tax

Rat

e

<T

ime

for

Fis

cal P

olic

y>

<D

epre

ciat

ion>

Cur

renc

y

Rat

io

<O

pen

Mar

ket

Pur

chas

e

(Pub

lic S

ale)

>

<O

pen

Mar

ket

Sal

e

(Pub

lic P

urch

ase)

>C

ash

Dem

and

Cas

hing

Tim

e

<G

old

Cer

tific

ates

>

<In

tere

st R

ate

(nom

inal

)>

Cur

renc

y R

atio

Tab

le

<W

ages

(B

ank

s)>

<G

old

Dep

osi

t>

<P

rice

>

Mone

y put

into

Cir

cula

tion

<In

itial

Cap

ital

Sha

res>

Initi

al S

ecur

ity H

old

ing

Rat

io h

eld

by

Co

nsum

er

Sec

urity

Ho

ldin

g R

atio

by

Co

nsum

er

Fin

anci

al

Inve

stm

ent

(Sha

res)

<C

apita

l Sha

res

New

ly I

ssue

d>

Eff

ect

on

Co

nsum

ptio

n

Dep

osi

ts

Ab

road

(Co

nsum

er)F

inan

cial

Inve

stm

ent

Ab

road

Fin

anci

al

Inve

stm

ent

Fin

anci

al

Inve

stm

ent

Rat

io

Initi

al F

inan

cial

Ass

ets

Abro

ad

Fin

anci

al

Inve

stm

ent

Index

Fin

anci

al I

nves

tmen

t

Index

Tab

le

<In

tere

st A

rbitr

age

Adju

sted

>

Inco

me

Ab

road

(Co

nsum

er)

<In

com

e A

bro

ad

(Co

nsum

er)>

<D

irec

t an

d F

inan

cial

Inve

stm

ent

Inco

me>

12

1

3

<In

tere

st p

aid

by

the

Go

vern

men

t (C

ons

umer

)>

<In

tere

st p

aid b

y

Ban

ks

(Co

nsum

er)>

Initi

al G

old

hel

d b

y

the

Pub

lic

Pri

ce E

last

icity

of

Co

nsum

ptio

n

<In

itial

Pri

ce le

vel>

<G

ove

rnm

ent

Sec

uriti

es (

Ban

ks)

><

Go

vern

men

t S

ecur

ities

(Cen

tral

Ban

k)>

Figure 33: Transactions of Consumers

38

Page 39: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Cas

h (G

ove

rnm

ent)

Deb

t (G

ove

rnm

ent)

Gove

rnm

ent

Exp

end

iture

Go

vern

men

t

Def

icit

Go

vern

men

t S

ecur

ities

New

ly I

ssue

d

Gove

rnm

ent

Bo

rro

win

g

Inte

rest

pai

d b

y th

e

Gove

rnm

ent

Cha

nge

in

Go

vern

men

t

Exp

end

iture

Tim

e fo

r

Fis

cal P

olic

y

Pri

mar

y B

alan

ce

Rat

io

Bas

e E

xpen

ditu

re

Rev

enue

-dep

end

ent

Exp

enditu

re

Go

vern

men

t D

ebt

Red

emp

tion

Go

vern

men

t

Deb

t P

erio

d

Ret

aine

d E

arni

ngs

(Go

vern

men

t)

Tax

Rev

enue

s<

Inco

me

Tax

>

<C

orp

ora

te T

ax>

<G

ove

rnm

ent

Sec

uriti

es N

ewly

Issu

ed>

<T

ax R

even

ues>

<In

tere

st p

aid

by

the

Gove

rnm

ent>

<G

ove

rnm

ent

Def

icit>

<G

ove

rnm

ent

Deb

t

Red

emptio

n>

Gro

wth

-dep

end

ent

Exp

end

iture

Cha

nge

in

Exp

end

iture

<G

row

th R

ate>

<T

ax o

n

Pro

duc

tion>

<In

tere

st R

ate

(no

min

al)>

Initi

al G

ove

rnm

ent

Deb

t

Pri

mar

y

Bal

ance

Sw

itch

Initi

al C

ash

(Go

vern

men

t)

Inte

rest

pai

d b

y th

e

Go

vern

men

t (C

entr

al B

ank

)

Inte

rest

pai

d b

y th

e

Go

vern

men

t (B

ank

s)

Inte

rest

pai

d b

y th

e

Go

vern

men

t (C

ons

umer

)

<G

DP

(Rev

enue

s)>

Deb

t-G

DP

rat

io

Sei

gnio

rage

Sw

itch

(Sei

gnio

rage

)

Pub

lic M

one

yIs

sue

Tim

e Issu

e D

urat

ion

<T

ax R

even

ues>

Dep

osi

ts

(Go

vern

men

t)G

ove

rnm

ent

Cre

diti

ng

<S

eign

iora

ge>

<S

witc

h

(Sei

gnio

rage

)>

Pub

lic M

one

y

Exp

end

iture

<P

ublic

Mo

ney>

<In

tere

st p

aid

by

the

Go

vern

men

t>

Pri

mar

y B

alan

ce

Cha

nge

Pri

mar

y B

alan

ce

Cha

nge

Tim

e

Sw

itch

(Sei

gnio

rage

)T

ime

<S

witc

h(S

eign

iora

ge)

Tim

e>

Figure 34: Transactions of Government

39

Page 40: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Ret

aine

d

Ear

ning

s

(Ban

ks)

Inte

rest

pai

d

by

Ban

ks

Inte

rest

pai

db

y P

rod

ucer

Dep

osi

ts

(Ban

ks)

Vau

lt C

ash

(Ban

ks)

Lo

an

(Ban

ks)

Req

uire

d

Res

erve

Rat

io

Dep

osi

ts in

RR

Rat

io C

hang

e

RR

Rat

io C

hang

e T

ime

Res

erve

s

Dep

osi

ts

Req

uire

d

Res

erve

s

<D

eposi

ts in

>

Res

erve

sA

T

<C

ash

Dem

and>

Dep

osi

ts o

ut

Res

erve

s

(Ban

ks)

Cas

h in

Go

vern

men

t

Sec

uriti

es

(Ban

ks)

Sec

uriti

espur

chas

ed b

yB

anks

<O

pen

Mar

ket

Pur

chas

e

(Ban

ks

Sal

e)>

<O

pen

Mar

ket

Sal

e

(Ban

ks

Pur

chas

e)>

<L

oan

(B

anks)

>

<S

avin

g>

<In

tere

st R

ate

(nom

inal

)>P

rim

e R

ate

Pro

fits

(Ban

ks)

<In

tere

st p

aid b

y

Ban

ks>

Wag

es (

Ban

ks)

Pay

men

t

by

Ban

ks

Cas

h out

<P

rod

ucer

Deb

t

Red

emp

tion>

<P

roduc

er D

ebt

Red

emptio

n>

Pri

me

Rat

e

Pre

miu

m

<G

ove

rnm

ent

Sec

uriti

es

New

ly I

ssue

d>

Exc

ess

Res

erve

Rat

io

<In

itial

Req

uire

d R

eser

ve R

atio

>

Sec

uriti

es s

old

by

Ban

ks

<S

ecur

ities

sold

by

Ban

ks>

<G

ove

rnm

ent

Deb

t

Red

emptio

n>S

ecur

ity H

old

ing

Rat

io b

y B

anks

Net

Dep

osi

ts

Exc

ess

Res

erve

s

Adju

stin

g

Res

erve

s

<E

xces

s

Res

erve

s>

<D

eposi

ts o

ut>

<F

inan

cial

Inve

stm

ent

(Sha

res)

><

Sec

uriti

espur

chas

ed b

yC

ons

umer

>

<D

esir

edB

orr

ow

ing

(Pro

duc

er)>

Deb

t

(Ban

ks)

Dis

coun

t R

ate

<D

ebt

(Ban

ks)

>

Cas

h F

low

Def

icit

(Ban

ks)

<C

ash

out

>

<R

eser

ves

Dep

osi

ts>

<S

ecur

ities

pur

chas

ed b

y

Ban

ks>

<D

esir

edB

orr

ow

ing

(Pro

duc

er)>

<P

aym

ent

by

Ban

ks>

Des

ired

Borr

ow

ing

(Ban

ks)

Ban

ks

Deb

t

Red

emptio

n

Ban

ks

Deb

t

Per

iod

<B

anks

Deb

t

Red

emptio

n>

Open

Mar

ket

Oper

atio

ns

Borr

ow

ing

(Ban

ks)

Len

din

g (B

ank

s)

Fore

ign

Exc

hang

e

(Ban

ks)

Fo

reig

n

Exc

hang

e out

<Im

port

s>

Fo

reig

n

Exc

hang

e in<

Exp

ort

s>

<Im

port

s>

<F

ore

ign

Exc

hang

e

Pur

chas

e>

<F

ore

ign

Exc

hang

e S

ale>

Net

Gai

ns b

yC

hang

es in

Fo

reig

n E

xcha

nge

Rat

e

Fo

reig

nE

xcha

nge

(Bo

ok V

alue

)

<F

ore

ign

Exc

hang

e

Rat

e> <F

ore

ign

Exc

hang

e

(Ban

ks)

(F

E)>

Net

Gai

n

Adju

stm

ent

Tim

e

<N

et G

ains

by

Cha

nges

in F

ore

ign

Exc

hang

e R

ate>

Fin

anci

al

Lia

bili

ties

Abro

adF

ore

ign

Fin

anci

al

Inve

stm

ent

Abro

ad<

Fin

anci

al I

nves

tmen

t

Abro

ad.f>

<F

ore

ign

Exc

hang

e R

ate>

Dir

ect

and F

inan

cial

Inve

stm

ent

Inco

me

<F

ore

ign

Fin

anci

al

Inve

stm

ent

Abro

ad>

Inte

rest

on

Fin

anci

al

Lia

bili

ties

Abro

ad

<In

tere

st R

ate

(nom

inal

)>

Fore

ign

Dir

ect

and

Fin

anci

al I

nves

tmen

tIn

com

e

<In

tere

st o

n F

inan

cial

Lia

bili

ties

Ab

road

>

<In

tere

st o

n

Fin

anci

al L

iabili

ties

Abro

ad>

<F

inan

cial

Inve

stm

ent

Abro

ad>

<F

inan

cial

Inve

stm

ent

Abro

ad>

<D

irec

t In

vest

men

t

Abro

ad>

<D

irec

t In

vest

men

t

Abro

ad>

Fore

ign

Cas

h o

ut

<F

ore

ign

Cas

h

out

>

2

3

2

3

2

3

2

3

2<

Div

iden

ds

Abro

ad>

3

<D

ivid

ends

Abro

ad>

<D

ivid

ends

Ab

road

.f>

<In

tere

st o

nF

inan

cial

Lia

bili

ties

Ab

road

.f>

<A

dju

stin

g

Res

erve

s>

Inte

rest

Inc

om

e

(Ban

ks)

Inte

rest

pai

db

y B

ank

s(C

ons

umer

)

Inte

rest

pai

dby

Ban

ks

(Cen

tral

Ban

k)

<In

tere

st p

aid b

y th

e

Gove

rnm

ent

(Ban

ks)

>

<In

tere

st I

ncom

e

(Ban

ks)

>

<F

ore

ign

Exc

hang

e

Pur

chas

e><

Fore

ign

Exc

hang

e

Sal

e>

<G

ove

rnm

ent

Sec

uriti

es (

Cons

umer

)>

<G

ove

rnm

ent

Sec

uriti

es

(Cen

tral

Ban

k)>

<L

endin

g (C

entr

al

Ban

k)>

<L

end

ing

Dis

trib

utio

n>

Len

din

g (C

entr

al

Ban

k-R

eser

ves)

<F

ore

ign

Exc

hang

e in

>

<F

ore

ign

Dir

ect

Inve

stm

ent

Ab

road

>

<F

ore

ign

Fin

anci

al

Inve

stm

ent

Ab

road

>

RR

Rat

io C

hang

e2

RR

Rat

io

Cha

nge2

Tab

le

<S

witc

h (S

eign

iora

ge)>

<L

end

ing

(Pub

lic

Mone

y)>

<B

orr

ow

ing

(Ban

ks)

>

Len

din

g (C

entr

al

Ban

k a

nd P

MA

)<

Len

din

g

Dis

trib

utio

n>

<S

witc

h

(Sei

gnio

rage

)>

<B

orr

ow

ing

(Ban

ks)

>

Figure 35: Transactions of Banks

40

Page 41: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Gold

Sta

ndar

d

Go

ld

Cur

renc

y

Out

stan

din

g

Res

erve

s

(Cen

tral

Ban

k)

Gold

Dep

osi

t

No

tes

New

ly

Issu

ed

Dep

osi

t T

ime

Res

erve

s b

y

Ban

ks

Go

ld C

ertif

icat

es

Gove

rnm

ent

Sec

uriti

es

(Cen

tral

Ban

k)

Op

en M

ark

et

Pur

chas

e

Op

en M

ark

et

Pur

chas

e T

ime

Open

Mar

ket

Pur

chas

eO

per

atio

n

<G

ove

rnm

ent

Sec

uriti

es

(Cons

umer

)>

Open

Mar

ket

Sal

e

Open

Mar

ket

Sal

e T

ime

Op

en M

arket

Sal

e O

per

atio

n

Open

Mar

ket

Sal

e

(Pub

lic P

urch

ase)

No

tes

With

dro

wn

Op

en M

ark

et

Pur

chas

e

(Pub

lic S

ale)

Open

Mar

ket

Pur

chas

e

(Ban

ks

Sal

e)

<G

ove

rnm

ent

Sec

uriti

es

(Ban

ks)

>

<O

pen

Mar

ket

Pur

chas

e (P

ublic

Sal

e)>

Op

enM

ark

et S

ale

(Ban

ks

Pur

chas

e)

Op

en M

ark

et

Pub

lic S

ales

Rat

e

Initi

al S

equr

ity H

old

ing

Rat

io b

y C

entr

al B

ank

Mo

neta

ry B

ase

Go

ld D

epo

sit

by

the

Pub

lic

<R

eser

ves

Dep

osi

ts>

<A

dju

stin

g

Res

erve

s>

Incr

ease

in

Res

erve

sD

ecre

ase

in

Res

erve

s

Dis

coun

t L

oan

(Cen

tral

Ban

k)

Len

din

g

(Cen

tral

Ban

k)

<L

end

ing

(Cen

tral

Ban

k)>

Len

din

g b

y P

MA

(Cen

tral

Ban

k)

Len

din

g

Tim

e

Len

din

g

Per

iod

<D

esir

ed

Bo

rrow

ing

(Ban

ks)

>

Win

dow

Gui

dan

ce

Fore

ign

Exc

hang

e

Res

erve

s

Fo

reig

n E

xcha

nge

Pur

chas

eF

ore

ign

Exc

hang

e

Low

er B

oun

d

<F

ore

ign

Exc

hang

e R

ate>

<F

ore

ign

Exc

hang

e

Pur

chas

e>

Fore

ign

Exc

hang

e

Sal

eF

ore

ign

Exc

hang

e

Up

per

bo

und

<F

ore

ign

Exc

hang

e S

ale>

<B

anks

Deb

t

Red

emp

tion>

Ret

aine

d

Ear

ning

s

(Cen

tral

Ban

k)

Inte

rest

Inc

om

e

(Cen

tral

Ban

k)

<In

tere

st p

aid

by

Ban

ks

(Cen

tral

Ban

k)>

<In

tere

st p

aid

by

the

Go

vern

men

t (C

entr

al B

ank)>

<In

tere

st I

nco

me

(Cen

tral

Ban

k)>

Initi

al G

old

hel

d b

y

the

Pub

lic

Gro

wth

Rat

e o

f

Cre

dit

Len

din

g (C

entr

al

Ban

k)(

-1)

Cur

renc

y O

utst

and

ing

(-V

ault

Cas

h)

<V

ault

Cas

h

(Ban

ks)

>

Sec

urity

Ho

ldin

g R

atio

by

Cen

tral

Ban

k

Sec

uriti

es p

urch

ased

by

Cen

tral

Ban

k

Sec

uriti

es s

old

by

Cen

tral

Ban

k

<G

ove

rnm

ent

Sec

uriti

es (

Cons

umer

)>

<G

ove

rnm

ent

Sec

uriti

es (

Ban

ks)

>

<G

ove

rnm

ent

Sec

uriti

es

New

ly I

ssue

d>

<G

ove

rnm

ent

Deb

t

Red

emp

tion>

<O

pen

Mar

ket

Sal

e

(Pub

lic P

urch

ase)

>

<S

ecur

ities

pur

chas

ed b

y

Cen

tral

Ban

k>

<O

pen

Mar

ket

Pur

chas

e

(Ban

ks

Sal

e)>

Len

din

g

Dis

trib

utio

n

<E

xport

s><

Imp

ort

s>

Sei

gnio

rage

Ass

ets

Res

erve

s

(Go

vern

men

t)

<S

eign

iora

ge>

<S

eign

iora

ge>

<G

ove

rnm

ent

Cre

diti

ng>

Ban

ks

Deb

t R

edem

ptio

n

(Pub

lic M

one

y)L

endin

g (P

ublic

Mone

y)

<S

witc

h

(Sei

gnio

rage

)>

Ban

ks

Deb

t R

edem

ptio

n

(Cen

tral

Ban

k)

Des

ired

Len

din

g

<L

end

ing

(Pub

lic

Mone

y)>

Figure 36: Transactions of Public Money Administration (Central Bank)

41

Page 42: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Fo

reig

n

Exc

hang

e R

ate

Cha

nge

in F

ore

ing

Exc

hang

e R

ate

Initi

al F

ore

ign

Exc

hang

e R

ate

Fore

ign

Exc

hang

e

Rat

io

Adju

stm

ent

Tim

e

of F

E

Fo

reig

n

Exc

hang

e

(Ban

ks)

(F

E)

Imp

ort

s (F

ore

ign

Exp

ort

s)

<E

xpo

rts.

f>

Exp

ort

s (F

ore

ign

Imp

ort

s)

<Im

po

rts.

f>

Sup

ply

of F

ore

ign

Exc

hang

e

Dem

and

fo

r F

ore

ign

Exc

hang

e

Rea

l Fo

reig

n

Exc

hang

e R

ate

<P

rice

> <P

rice

.f>

Fore

ign

Exc

hang

e P

urch

ase

(FE

)F

ore

ign

Exc

hang

e S

ale

(FE

)

<F

ore

ign

Exc

hang

e

Pur

chas

e><

Fore

ign

Exc

hang

e S

ale>

Initi

al F

ore

ign

Exc

hang

e (F

E)

Exp

ecte

d

Fo

reig

n

Exc

hang

e R

ate

Cha

nge

in E

xpec

ted

Fo

reig

n E

xcha

nge

Rat

e

Ad

just

men

t T

ime

of

Fo

reig

n E

xcha

nge

Exp

ecta

tion

Exp

ecte

d

Cha

nge

in

FE

R

seed

s

mea

n

stan

dar

d

dev

iatio

n

<In

tere

st

Rat

e>

<In

tere

st

Rat

e.f>

Inte

rest

Arb

itrag

e

Ad

just

ed

Inte

rest

Arb

itrag

eA

dju

sted

.f

Inte

rest

Arb

itrag

e Inte

rest

Arb

itrag

e.f

Exp

ecte

d R

etur

n o

n

Dep

osi

ts A

bro

ad

Exp

ecte

d R

etur

n o

n

Dep

osi

ts A

bro

ad.f

Arb

itrat

e

Ad

just

men

t T

ime

<F

ore

ign

Exc

hang

e R

ate>

<E

xpec

ted

Fo

reig

n

Exc

hang

e R

ate>

<A

rbitr

ate

Ad

just

men

t T

ime>

Fo

reig

n E

xcha

nge

out

(F

E)

Fore

ign

Exc

hang

e

in (

FE

)

Fo

reig

n D

irec

t an

dF

inan

cial

Inv

estm

ent

Inco

me

(FE

)

<F

inan

cial

Inv

estm

ent

Abro

ad.f

>

<F

inan

cial

Inve

stm

ent

Ab

road

(F

E)>

<D

irec

t

Inve

stm

ent

Ab

road

(F

E)>

<D

irec

tIn

vest

men

tA

bro

ad.f>

Dir

ect

and

Fin

anci

al

Inve

stm

ent

Inco

me

(FE

)

Fo

reig

n E

xcha

nge

Res

erve

s (F

E)

Initi

al F

ore

ign

Exc

hang

e

Ho

ldin

g R

atio

<F

ore

ign

Dir

ect

and

Fin

anci

al I

nves

tmen

tIn

com

e>

Eff

ect

on

Fo

reig

n

Exc

hang

e R

ate

Rat

io E

last

icity

(E

ffec

t on

Fo

reig

n E

xcha

nge

Rat

e)

Des

ired

Fore

ign

Exc

hang

e R

ate

FF

Rat

io

(Rev

ised

)

Figure 37: Foreign Exchange Market

42

Page 43: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

Fo

reig

n

Exc

hang

e

(Ban

ks)

Fo

reig

n

Exc

hang

e o

ut

<Im

po

rts>

Fo

reig

n

Exc

hang

e in

<E

xpo

rts>

<F

ore

ign

Exc

hang

e

Pur

chas

e><

Fo

reig

n

Exc

hang

e S

ale>

Deb

it (

- P

ay

me

nt)

___

__

__

__

__

___

__

__

__

__

__

Cre

dit

(+

Rece

ipt)

Deb

it (

- F

ore

ign

Pa

ym

en

t)_

__

__

__

__

__

__

_ C

red

it (

+ F

ore

ign

Rece

ipt)

Inve

ntory

(Tra

de)

(FE

Rece

ipts

fro

m

Ab

roa

d)

(FE

Dep

osi

ts A

bro

ad

for

Pa

ym

en

t)

<Im

po

rts>

<E

xpo

rts>

Tra

de

Bal

ance

Go

od

s &

Ser

vice

s

Cur

rent

Acc

oun

t

Bal

ance

of

Pay

men

ts

Fin

anci

al

Acc

oun

t

Cap

ital &

Fin

anci

al

Acc

oun

t

Oth

er I

nves

tmen

t

(Cre

dit)

Oth

er I

nves

tmen

t

(Deb

it)

Oth

er I

nves

tmen

t

Cha

nges

in

Res

erve

Ass

ets

Dir

ect

and P

ort

folio

Inv

estm

ent

<O

ther

Inve

stm

ent>

<C

hang

es in

Res

erve

Ass

ets>

Ass

ets

Abro

ad

<F

ore

ign

Exc

hang

eP

urch

ase>

<F

ore

ign

Exc

hang

e S

ale>

Ret

aine

d

Ear

ning

s an

d

Co

nsum

er

Eq

uity

Ear

ning

s in

<N

et G

ains

by

Cha

nges

in

Fo

reig

n E

xcha

nge

Rat

e>

Ser

vice

Inc

om

e

Lia

bili

ties

Abro

ad

<D

irec

t an

d F

inan

cial

Inve

stm

ent

Inco

me>

<F

ore

ign

Fin

anci

al

Inve

stm

ent

Ab

road

>

<F

ore

ign

Fin

anci

al

Inve

stm

ent

Ab

road

>

<F

ore

ign

Dir

ect

and

Fin

anci

al I

nves

tmen

tIn

com

e>E

arni

ngs

out

<F

ore

ign

Dir

ect

and

Fin

anci

alIn

vest

men

tIn

com

e>

<D

irec

t an

dF

inan

cial

Inve

stm

ent

Inco

me>

Inco

me

Bal

ance

<F

inan

cial

Inve

stm

ent

Ab

road

>

<F

inan

cial

Inve

stm

ent

Ab

road

>

<D

irec

t In

vest

men

t

Ab

road

>

<D

irec

tIn

vest

men

tA

bro

ad>

<F

ore

ign

Dir

ect

Inve

stm

ent

Ab

road

>

<F

ore

ign

Dir

ect

Inve

stm

ent

Ab

road

>

Net

Fo

reig

n

Exc

hang

e (B

ank

s)

Figure 38: Balance of Payment

43

Page 44: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

60

0Y

enR

eal/Y

ear

0.2

1/Y

ear

45

0Y

enR

eal/Y

ear

-3.7

25

29

e-0

09

1/Y

ear

30

0Y

enR

eal/Y

ear

-0.2

1/Y

ear

15

0Y

enR

eal/Y

ear

-0.4

1/Y

ear

0Y

enR

eal/Y

ear

-0.6

1/Y

ear

66

66

66

66

55

55

55

55

44

44

44

44

4

33

33

33

33

3

22

22

22

22

2

11

11

11

11

1

02

46

81

01

214

16

18

20

22

24

26

28

30

Tim

e (Y

ear)

11

11

11

1

22

22

22

33

33

3

44

44

44

55

55

55

66

66

66

6

80

Yen

/Yea

r

400

Yen

60

Yen

/Yea

r

300

Yen

40

Yen

/Yea

r

200

Yen

20

Yen

/Yea

r

100

Yen

0Y

en/Y

ear

0Y

en

5

5

5

5

5

5

5

55

54

44

44

44

44

4

33

3

3

3

3

33

33

22

22

22

22

22

2

11

11

11

11

11

1

02

46

81

01

214

16

18

20

22

24

26

28

30

Tim

e (Y

ear)

11

11

11

22

22

2

33

33

33

44

44

55

55

55

Cha

nge

in G

ove

rnm

ent

Exp

enditu

re

-40

40

Tim

e fo

r F

isca

l Po

licy

05

0

Corp

ora

te T

ax R

ate

00

.3

Pri

mar

y B

alan

ce C

hang

e

-0.5

0.5

Sw

itch

01

Bas

e E

xpen

ditu

re

20

12

0

Indep

enden

t <

--->

Rev

enue

-dep

enden

t

2Y

en/Y

enR

eal

0.0

41

/Yea

r

1.5

Yen

/Yen

Rea

l

0.0

32

51

/Yea

r

1Y

en/Y

enR

eal

0.0

25

1/Y

ear

0.5

Yen

/Yen

Rea

l

0.0

17

51

/Yea

r

0Y

en/Y

enR

eal

0.0

11

/Yea

r

2

2

22

22

22

22

22

22

2

111

11

11

11

11

11

11

1

30

032

23

43

36

538

6

"GD

P (

real

)"

11

11

11

11

11

1

22

22

22

22

22

2

"Cha

nge

in L

ump-s

um T

axes

"

-10

30

Go

vern

men

t D

ebt

Per

iod

150

Cha

nge

in I

nco

me

Tax

Rat

e

-0.1

0.1

Cha

nge

in E

xcis

e R

ate

-0.0

50.1

5

Initi

al G

ove

rnm

ent

Deb

t

05

00

100

Per

son

0.4

Per

son/

Yea

r

90

Per

son

0.2

Per

son/

Yea

r

80

Per

son

0P

erso

n/Y

ear

70

Per

son

-0.2

Per

son/

Yea

r

60

Per

son

-0.4

Per

son/

Yea

r

33

3

33

33

33

33

33

2

22

2

22

2

22

22

22

1

1

1

11

11

11

11

1

1

02

46

81

01

214

16

18

20

22

24

26

28

30

Tim

e (Y

ear)

11

11

11

1

22

22

22

22

33

33

33

3

Del

ay T

ime

of P

rice

Cha

nge

02

.4

Del

ay T

ime

of W

age

Cha

nge

01

0

Lab

or

Mar

ket

Fle

xib

ility

01

0

"Co

st-p

ush

(Wag

e) C

oef

ficie

nt"

00.6

8

"Out

put

Rat

io E

last

icity

(E

ffec

t on

Pri

ce)"

02

Wei

ght

of

Inve

ntory

Rat

io

01

"Lab

or

Rat

io E

last

icity

(E

ffec

t on

Wag

e)"

02

"Mone

y R

atio

Ela

stic

ity (

Eff

ect

on

Inte

rest

Rat

e)"

0.1

2

Del

ay T

ime

of In

tere

st R

ate

Cha

nge

12

0

Vel

oci

ty o

f M

one

y

0.5

1.5

5

5

5

5

55

4

4

4

4

4

4

4

33

3

3

3

33

2

22

22

22

11

1

1

1

11

11

11

11

22

23

34

44

45

55

"Sw

itch

(Sei

gnio

rage

)"

01

Pub

lic M

one

y

05

0

Issu

e T

ime

150

Issu

e D

urat

ion

11

5

Pri

mar

y B

alan

ce C

hang

e T

ime

150

"Sw

itch

(Sei

gnio

rage

) T

ime"

03

0

Figure 39: Simulation Panel of GDP

44

Page 45: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

600

Yen

Rea

l/Yea

r

0.2

1/Y

ear

300

Yen

Rea

l/Yea

r

-0.2

1/Y

ear

0Y

enR

eal/Y

ear

-0.6

1/Y

ear

66

66

66

66

6

55

55

55

55

5

44

44

44

44

44

33

33

33

33

33

22

22

22

22

22

11

11

11

11

11

01

23

45

67

89

10

11

12

13

14

15

16

17

18

19

Tim

e (Y

ear)

11

11

11

1

22

22

22

33

33

3

44

44

44

55

55

55

66

66

66

66

1.4

1.2 1

0.8

0.6

33

33

33

33

33

33

33

33

33

22

22

22

22

22

22

22

22

22

11

11

11

11

11

11

11

11

11

01

23

45

67

89

10

11

12

13

14

15

16

17

18

19

Tim

e (Y

ear)

11

11

11

11

11

1

22

22

22

22

33

33

33

33

3

0.6

0.3 0

-0.3

-0.6

22

2

22

2

22

22

2

2

11

1

1

1

1

11

1

1

1

1

02

46

81

012

14

16

18

Tim

e (Y

ear)

11

11

11

22

22

22

0.8

0.4 0

-0.4

-0.8

44

44

44

44

33

33

33

33

22

2

2

22

2

2

11

1

1

11

1

1

1

02

46

81

01

21

41

61

8

Tim

e (Y

ear)

11

11

11

22

22

23

33

33

44

44

4

Import

s C

oef

ficie

nt

00

.2

"Im

port

s C

oef

ficie

nt.f

"

00

.2

0.0

08

0.0

04 0

-0.0

04

-0.0

08

2

2

2

2

2

2

22

2

2

2

2

11

1

1

1

1

11

11

1

1

1

02

46

81

01

21

41

61

8

Tim

e (Y

ear)

11

11

11

11

22

22

22

22

Fin

anci

al I

nves

tmen

t R

atio

00.2

"Fin

anci

al I

nves

tmen

t R

atio

.f"

00.2

40

Yen

/Yea

r

0.6

Yen

/Yea

r

30

Yen

/Yea

r

0Y

en/Y

ear

20

Yen

/Yea

r

-0.6

Yen

/Yea

r

33

3

3

3

3

3

3

3

3

22

22

22

22

22

2

11

11

11

11

11

1

02

46

810

12

14

16

18

Tim

e (Y

ear)

11

11

11

22

22

22

33

33

2

1.4

0.8

0.2

-0.4

22

2

22

22

22

2

22

22

2

2

11

11

11

1

1

11

11

11

11

02

46

81

01

214

16

18

Tim

e (Y

ear)

11

11

11

11

11

12

22

22

22

22

2

Dir

ect

Inve

stm

ent

Rat

io

00.2

"Dir

ect

Inve

stm

ent

Rat

io.f

"

00.2

Ad

just

men

t T

ime

of

FE

13

0

Initi

al F

inan

cial

Ass

ets

02,0

00

"Ini

tial F

inan

cial

Ass

ets.

f"

02,0

00

seed

s

110

0m

ean

-0.1

0.1

1.5

1.2

5 1

0.7

5

0.5

33

33

33

33

33

33

33

33

32

22

22

22

22

22

22

22

22

21

11

11

11

11

11

11

11

11

1

01

23

45

67

89

10

11

12

13

14

15

16

17

18

19

Tim

e (Y

ear)

11

11

11

11

11

11

11

22

22

22

22

22

22

2

33

33

33

33

3

"Rat

io E

last

icity

(E

ffec

t on

Fore

ign

Exc

hang

e R

ate)

"

01.5

stan

dar

d d

evia

tion

00

.3

Figure 40: Simulation Panel of Trade and Investment Abroad

45

Page 46: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

References

[1] Irving Fisher. 100% Money and the Public Debt. ThaiSunset Publications,Thailand, Originally 1936, 2009.

[2] Edward G. Griffin. The Creature from Jekyll Island - A Second Look at theFederal Reserve. American Media, California, USA, 2006.

[3] E. Robert Hall and B. John Taylor. Macroeconomics. W.W. Norton &Company, New York, 5th edition, 1997.

[4] N. Gregory Mankiw. Macroeconomics. Worth Publishers, New York, 5thedition, 2003.

[5] Campbell R. McConnell and Stanley L. Bruce. Macroeconomics - Princi-ples, Problems, and Policies. McGraw-Hill/Irwin, New York, seventeenthedition, 2008.

[6] Frederic S. Mishkin. The Economics of Money, Banking, and FinancialMarkets. Addison Wesley, New York, 7th edition, 2006.

[7] Richard A. Werner. Princes of the Yen: Japan’s Central Bankers and theTransformation of the Economy. M.E. Sharpe, New York, 2003.

[8] Thomas E. Woods. Meltdown - A Free-Market Look at Why the StockMarket Collapsed, the Economy Tanked, and Government Bailouts WillMake Things Worse. Regnery Publishing, Inc., Washington, D.C., 2009.

[9] Kaoru Yamaguchi. Principle of Accounting System Dynamics– ModelingCorporate Financial Statements –. In Proceedings of the 21st InternationalConference of the System DynamicsSociety, New York, 2003. System Dy-namics Society.

[10] Kaoru Yamaguchi. Money Supply and Creation of Deposits : SD macroe-conomic modeling (1). In Proceedings of the 22nd International Conferenceof the System Dynamics Society, Oxford, England, 2004. The System Dy-namics Society.

[11] Kaoru Yamaguchi. Aggregate Demand Equilibria and Price Flexibility :SD macroeconomic modeling (2). In Proceedings of the 23nd InternationalConference of the System Dynamics Society, Boston, USA, 2005. The Sys-tem Dynamics Society.

[12] Kaoru Yamaguchi. Integration of Real and Monetary Sectors with LaborMarket: SD macroeconomic modeling (3). In Proceedings of the 24th In-ternational Conference of the System Dynamics Society, Nijmegen, TheNetherlands, 2006. The System Dynamics Society.

46

Page 47: Workings of A Public Money System of Open …bs.doshisha.ac.jp/.../26831/file/DBS-10-02.pdfWorkings of A Public Money System of Open Macroeconomies – Modeling the American Monetary

[13] Kaoru Yamaguchi. Balance of Payments and Foreign Exchange Dynamics:SD macroeconomic modeling (4). In Proceedings of the 25th InternationalConference of the System Dynamics Society, Boston, USA, 2007. The Sys-tem Dynamics Society.

[14] Kaoru Yamaguchi. Open Macroeconomies As a Closed Economic System:SD macroeconomic modeling completed. In Proceedings of the 26th In-ternational Conference of the System Dynamics Society, Athens, Greece,2008. The System Dynamics Society.

[15] Kaoru Yamaguchi. Logical vs Historical Time in a Price Adjustment Mech-anism. In Proceedings of the 27th International Conference of the SystemDynamics Society, Albuquerque, New Mexico, 2009. The System DynamicsSociety.

[16] Kaoru Yamaguchi. On the Liquidation of Government Debt under a Debt-free Money System: Modeling the American Monetary Act. In Proceed-ings of the 28th International Conference of the System Dynamics Society,Seoul, Korea, 2010. The System Dynamics Society.

[17] Stephen Zarlenga. The Lost Science of Money: The Mythology of Money -the Story of Power. American Monetary Institute, New York, 2002.

[18] Stephen Zarlenga. Presenting the American MonetaryAct (as of July 18, 2009. American Monetary Institute,http//:www.monetary.org/32pageexplanation.pdf, 2009.

47