How 'Monetization' Really Works—Examples from Nations’ Policy Responses to COVID-19

27 Pages Posted: 25 Oct 2020 Last revised: 28 Oct 2020

See all articles by Jesus Felipe

Jesus Felipe

Asian Development Bank

Scott Fullwiler

University of Missouri at Kansas City

Gemma Bolotaulo Estrada

Asian Development Bank - Economic Research

Maria Hanna Jaber

Asian Development Bank

Maria Ann Magadia

Asian Development Bank

Remrick Patagan

Asian Development Bank

Date Written: October 19, 2020

Abstract

The severe economic downturn caused by the 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 Philippines, Singapore, People’s Republic of China, and US clarify this.

Keywords: Central Bank, corridor system, monetization, inflation, printing money

JEL Classification: E42, E52, E58

Suggested Citation

Felipe, Jesus and Fullwiler, Scott and Estrada, Gemma Bolotaulo and Jaber, Maria Hanna and Magadia, Maria Ann and Patagan, Remrick, How 'Monetization' Really Works—Examples from Nations’ Policy Responses to COVID-19 (October 19, 2020). Available at SSRN: https://ssrn.com/abstract=3714541 or http://dx.doi.org/10.2139/ssrn.3714541

Jesus Felipe (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Scott Fullwiler

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Gemma Bolotaulo Estrada

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Maria Hanna Jaber

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Maria Ann Magadia

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Remrick Patagan

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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