Political Economy of the Monetary-Fiscal-Financial-Nexus

Distributional effects of the changing interrelations of private and public money creation in the Eurozone
Research groups - Monetary Sovereignty

Most economic analyses are dedicated to the different tasks and the interplay between the private and the public hand. There is a long history of different schools of thought discussing the relationship between the state and (financial) markets: Whether public investment crowds out or crowds in private investment; whether the public ought to de-risk private investment and if so under what circumstances etc. Those are very heated discussions, carrying fundamental distributional questions at their core.  
However, private and public relations are often ignored or disguised in the monetary and financial realms. Nevertheless, they play a fundamental distributional role, particularly considering the massive expansion of private and public money creation in recent decades.
Financial innovations, such as securitisation and collateralisation, enable ever more private money creation. Government bonds play a central role in these new forms of private money creation, as they are used as collateral in most repurchase agreements. These forms of less regulated finance, also called shadow banking, can have fundamentally destabilising consequences for the entire financial system. Consequentially, in times of crisis, central banks are increasingly buying up government bonds to guarantee the stability of the entire financial system.
The mainstream economic theory fails both to adequately describe and address these developments, assuming a clear separation between the monetary, fiscal, and financial spheres. This is most evident in the notion of central bank independence and its commitment to market neutrality. Central banks should neither support fiscal policies by buying government bonds nor should they distort the inner dynamics of financial markets in any other way.

The recent developments in private and public money creation challenge the mainstream view and thereby raise many questions: First of all, it requires a more accurate and holistic understanding of the changing relationship among monetary, fiscal and financial actors. How do practices such as repo banking reconstitute the relationship between the private and the public? What are the new forms of domination and power centres that emerge in such a quickly innovating environment? What are the distributional consequences of these developments? In the context of the Eurozone, which states benefit most, and which are more hostile towards such transformations? And finally, what burdens and possibilities do the new forms of private and public money creation offer for the green transformation?

In order to address these questions appropriately, it is necessary to challenge the sharp separation between the private and the public advocated by the mainstream. This means asking how the indicated changes in the power relations of private and public money creation can be analysed if one does NOT distinguish a priori between the fiscal, financial and monetary spheres. Hence, this project assumes that perceiving them as a nexus, namely the Monetary-Fiscal-Financial-Nexus, is fundamental. Such an understanding highlights the interrelations among the various actors that can be captured by their interlinking balance sheets. It thereby allows tracking the issuance, trading, maintenance, and settlements of monetary claims, which can tell a story about the shifting power centres and their distributional consequences.