‘Overt Monetary Financing’ in Terms of Simplicity and Transparency

Government spending has two immediate and direct macro effects. It:

  1. adds to the net financial assets held by non-government;
  2. creates income equal to the amount spent.

This is the case whether the central bank is (A) permitted to purchase government bonds directly from the fiscal authority (‘overt monetary financing’) or instead (B) is required to buy them from the private sector (currently the procedure under “normal” circumstances in many countries). It is also true if (C) the government simply spends without issuing bonds and pays its policy rate (which can be zero) on reserve balances.

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