Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/246704 
Year of Publication: 
2020
Series/Report no.: 
ADB Economics Working Paper Series No. 627
Publisher: 
Asian Development Bank (ADB), Manila
Abstract: 
The severe economic downturn caused by the coronavirus disease (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 People's Republic of China, the Philippines, Singapore, and the United States clarify this.
Subjects: 
central bank
corridor system
inflation
monetization
printing money
JEL: 
E42
E52
E58
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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