Monetize Fiscal Deficit

RGE Monitor

# BoJ and BoE urged in February by advisors and politicians to print money to fund more aggressive economic stimulus measures. SNB noted in December that it may buy up bonds to influence long-term interest rates
# Dec 1 Bernanke speech and Jan 28 FOMC statement signaled readiness of Fed to buy long-term Treasuries. Feb 9, Fisher cautioned the Fed must "be very careful to avoid the perception that it is monetizing the explosion of fiscal deficits"
# Buiter: When the government provides a fiscal stimulus to demand, the Treasury has to issue additional debt. If this debt is not bought by the central bank, it will have be be held willingly by the domestic private sector and the public sector. The only way to ensure that larger public sector deficits do not add to the sovereign default risk premia is for the central bank to buy the additional government debt. Assuming the central bank does not finance this purchase of public debt by selling private securities but instead by increasing the monetary base, the deficit is monetized and no financial crowding out occurs
# Buiter: The commitment to both price stability and debt monetization is possible if 1) the central bank will de-monetise again when liquidity preference shrinks, and 2) the government(s) will act countercyclically in good times as in bad times and will raise taxes or cut public spending as soon as the economy is back to normal
# Roubini, Christiano/Fitzgerald: The "fiscal theory of the price level" suggests that fiscal deficits may or may not lead to high inflation depending on whether there is "fiscal dominance" or "monetary dominance". If there is "fiscal dominance", the deficit policies of a fiscal authority will eventually force the central bank to monetize the deficit, i.e. to increase seignorage and use the inflation tax to finance an exogenous fiscal deficit path. If there is "monetary dominance", the central bank commits not to monetize the deficits and the fiscal authority is forced to adjust its budget policy (i.e. cut spending or raise taxes) to satisfy its intertemporal budget constrain

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