MMTers often say that financing government spending less taxes by issuing government debt is a policy choice, because they could instead create reserves (electronic money) at commercial banks. Of course only governments that have their own currency can do this, so this option is not available to Eurozone governments for example. If governments could finance deficits by creating money/reserves, would they want to do so?
The textbook answer (see here for example) is that monetary financing is inflationary, which is why most governments delegate reserve creation to independent central banks. This is not because of any crude monetarism: in mainstream macro the idea that there is a predictable and causal link between money creation and inflation died many decades ago, and today is believed by only a few. Instead the textbook story relies on the idea that governments creating money would undermine the ability of central banks to control the short term interest rate. Money financing would force interest rates to zero, and that would be inflationary.
However textbooks are nearly always out of date, and this explanation for why money financing would be inflationary became largely irrelevant when central banks started paying interest on reserves. Reserves are like electronic money held by commercial banks, the quantity of which is controlled by central banks. Today central banks control short term interest rates by paying that interest rate on reserves. As a result, it is possible to create large amounts of money/reserves without this ending in higher inflation.
We know this because of Quantitative Easing (QE), where central banks created large amounts of reserves in order to buy government debt. When they did this after the Global Financial Crisis (GFC) we didn’t get hyperinflation! The idea that recent inflation is a result of the
