How 'Monetization' Really Works—Examples from Nations’ Policy Responses to COVID-19
27 Pages Posted: 25 Oct 2020 Last revised: 28 Oct 2020
Date Written: October 19, 2020
The severe economic downturn caused by the COVID-19 pandemic has forced governments worldwide to increase spending while tax revenues simultaneously collapsed. Concurrent with this, central banks in several of these countries are financing a significant percent of their direct income support through direct lending or purchases of government bonds in primary and/or secondary markets. Many oppose this for their alleged negative consequences on the economy, inflation in particular. This paper describes the actual workings of what most people (including many economists) often call monetization of government debt and its major implication, namely, that it leads to printing money and, consequently, to inflation. We show that the reality is very different: once one knows how modern central banks manage monetary policy (i.e., through a corridor interest rate targeting system), and how they coordinate their daily operations with their Treasuries, monetization does not occur as it is often described, and it is not nearly as dangerous as its critics argue (and not as useful as its supporters claim). The examples of the Philippines, Singapore, People’s Republic of China, and US clarify this.
Keywords: Central Bank, corridor system, monetization, inflation, printing money
JEL Classification: E42, E52, E58
Suggested Citation: Suggested Citation