Monetize Fiscal Debt

RGE Monitor

# 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
# Wilder: The Treasury is sterilizing the Fed's liquidity measures, rather than the Fed monetizing the Treasury's debt, but at some point the Fed may choose to monetize new debt issued by the Treasury
# RTE: In a 2002 speech on preventing deflation, Bernanke suggested financing new tax cuts and spending increases with money printed by the Federal Reserve. If the money is spent, the economy should start to recover
# 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 constraint

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