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  In the Chapter the author examines fiscal policy for a government that issues its own currency. 4.1 Introductory principles Statements that do not apply to a sovereign currency issuer According to the author, the following statements are common beliefs that actually are false and do not apply to a sovereign currency-issuing government.   Governments have a budget constraint (like households and firms) and have to raise funds through taxing or borrowing. Budget deficits are evil, a burden on the economy except under some special circumstances (such as a deep recession). Government deficits drive interest rates up, crowd out the private sector, and lead to inflation. Government deficits take away savings that could be used for investment. Government deficits leave debt for future generations; the government needs to cut spending or tax more today to diminish this burden. Higher government deficits today imply higher taxes tomorrow, to pay interest and principal on the debt that

I n this chapter, the author presents an analysis of the operation of today’s monetary system. IOUs denominated in the national currency Government IOUs Assets and liabilities are denominated in the national currency which is chosen by the national government. To drive the usage of national currency the government imposes tax liability on the citizens which can be discharged by delivering the national currency. When a country adopts a floating exchange rate regime, the government’s own IOUs i.e the national currency is non-convertible. It means that the government does not promise to convert them to precious metals or foreign currencies or anything else. The government just promises to accept its own IOU in payments made to itself. This ensures that there will be a demand for government IOUs at least to the extent required to make tax payments. To increase the acceptability of its IOUs, the government can make it convertible into precious metal or foreign currency. But the trade-off he