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Monetization of Fiscal Deficits and COVID-19: A Primer

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Abstract

Monetization--also known as "money-financed fiscal programs" or "money-printing"--occurs when a government finances itself by issuing currency or other non-interest-bearing liabilities, such as bank reserves. It poses real risks--potentially excessive inflation and encroachment on central-bank independence--and some paint it as a relic of a bygone era. The onset of the COVID-19 crisis, however, forced governments to spend heavily to combat the considerable economic and public health impacts. As government deficits climbed, monetization re-entered the conversation as a way to avoid the massive debt burdens that some nations may face. This paper describes how monetization works, provides key historical examples, and examines recent central-bank measures. Based on our definition, much of what many are calling monetization today--in particular, central banks directly buying massive amounts of their own government's bonds--is not necessarily monetization. To our knowledge, no central bank during the COVID-19 crisis took an action that meets our definition or explicitly stated that it was conducting monetization.

Suggested Citation

  • Feldberg, Greg, 2020. "Monetization of Fiscal Deficits and COVID-19: A Primer," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 2(4), pages 1-35, April.
  • Handle: RePEc:ysm:ypfsfc:2411
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    File URL: https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1124&context=journal-of-financial-crises
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    References listed on IDEAS

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    1. Carmen M. Reinhart & M. Belen Sbrancia1, 2015. "The liquidation of government debt," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 30(82), pages 291-333.
    2. Kenneth D. Garbade, 2014. "Direct purchases of U.S. Treasury securities by Federal Reserve banks," Staff Reports 684, Federal Reserve Bank of New York.
    3. Christian Beer & Ernest Gnan & Maria Teresa Valderrama, 2016. "A (not so brief ) history of inflation in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 6-32.
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    Cited by:

    1. Aneesha Chitgupi & Ajay Shah & Manish K. Singh & Susan Thomas & Harsh Vardhan, 2024. "Who lends to the Indian state?," Working Papers 34, xKDR.
    2. Jan Kubíček & Pavel Morda, 2023. "Fiskální deficit a emise peněz v České republice v době pandemie covidu-19 [Fiscal Deficit and Money Issuance in Czech Republic during COVID-19 Pandemic]," Politická ekonomie, Prague University of Economics and Business, vol. 2023(1), pages 68-88.

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    More about this item

    Keywords

    monetization; monetary policy; fiscal policy; monetary finance;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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