what is a montetized debt? (course hero)

What happens when government deficits are financed through debt monetization?

When government deficits are financed through debt monetization the outcome is an increase in the monetary base, shifting the aggregate-demand curve to the right leading to a rise in the price level (unless the money supply is infinitely elastic ).

What is meant by monetization of debt?

Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to the private sector or raising taxes. It is often informally and pejoratively called printing money or money creation.

Does debt monetization violate the doctrine of central bank independence?

Because the process implies coordination between the government and the central bank, debt monetization is seen as contrary to the doctrine of central bank independence.

Is quantitative easing an ex-post monetisation of debt?

Moreover, quantitative easing could become an ex-post monetisation of debt if the debt securities held by the central bank were to be cancelled or converted into perpetual debt, as is sometimes proposed.

What is debt monetization?

Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to the private sector or raising taxes. It is often informally and pejoratively called printing money or money creation.

What happens when debt is monetized?

When government deficits are financed through debt monetization the outcome is an increase in the monetary base, shifting the aggregate-demand curve to the right leading to a rise in the price level (unless the money supply is infinitely elastic ).

How does monetary financing work?

In its most direct form, monetary financing would theoretically take the form of a irreversible direct transfer of money from the central bank to the government. However in practice monetary financing is most usually done in a way that is reversible, for example by offering costless direct credit lines or overdrafts to the government. The Bank of England can do this for example through its "way and means" facility. In this cases, the government does have a liability towards the central bank.

What is the second form of direct monetary financing?

A second form of direct monetary financing is the purchase of government debt securities on issue (i.e. on the primary market). In this case, the central bank can in theory resell the acquired treasury bills.

Why is QE not justified?

Moreover, the intention of the central bank is different: the QE programmes are not justified to finance governments, but to push down long rates in order to stimulate money creation through bank credit. The increase in the government deficit that these policies allow is presented as an unintended side effect.

When did the Japan debt monetization exemption expire?

After the war, the exemption was renewed, with time limitations, until it was allowed to expire in June 1981. In Japan, where debt monetization is on paper prohibited, the nation's central bank "routinely" purchases approximately 70% of state debt issued each month, and owns, as of October 2018. [update]

Does QE reduce indebtedness?

Indeed, insofar as ECB QE effectively reduces the cost of indebtedness of Eurozone countries by lowering market rates, and as central banks pass on to governments the profits made on these public debt obligations, the benefit of QE policy is significant for governments.

Overview

Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to private investors or raising taxes. The central banks who buy government debt, are essentially creating new money in the process to do so.
This practice is often informally and pejoratively called printing money or money creation. It is pr…

Forms of monetary financing

Legal prohibitions against monetary financing

Policy debate