Report
Fiscal solvency when money is held as an investment asset in financial portfolios
The usual theory of fiscal solvency assumes that money is held as a transaction currency and that there is therefore a stable link between demand for money and nominal GDP. It is in this context that fiscal solvency can be obtained with an inflation tax that results from the monetisation of public debt. But what happens when money is held for investment reasons in the context of portfolio choice, and the link between the money supply and the value of production (and therefore the money supply and goods prices) disappears? We then see a very different mechanism, where public debt monetisation improves a country’s fiscal solvency both because a portion of the fiscal deficit is financed with money creation and because long-term interest rates fall.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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