The concept of monetary financing is covered in this short revision video.
Monetary financing has become more prominent as a possible macroeconomic policy as the covid-19 crisis has engulfed many countries including the UK. The UK government for example has seen their spending surge including the billions spent on the Job Protection Scheme whilst at the same time, tax revenues have dropped sharply. The result has been a dramatic increase in government borrowing.
An article published by the Financial Times in April 2020 read: "The UK has become the first country to embrace the monetary financing of government to fund the cost of fighting coronavirus, with the Bank of England agreeing to directly finance the state’s spending needs on a temporary basis.”
What is monetary financing?
Monetary financing is a direct transfer of money from a central bank for a government to spending. This might involve the direct purchasing of new government debt (bonds) by a central bank.
How does monetary financing differ from quantitative easing (QE)?
Monetary financing (MF) is not quantitative easing (QE) which happens when a central bank makes bond purchases in the secondary market. QE is not meant to be a permanent feature of monetary policy whereas MF is the creation of permanent central bank money.
Monetary financing in 2020
“In response to the COVID-19 pandemic, the USA Federal Reserve will buy unlimited quantities of Treasury bonds, the Bank of England will purchase £200 billion of gilts, and the European Central Bank up to €750 billion of eurozone bonds. Almost certainly, central banks will end up providing monetary finance to fund fiscal deficits.”
Source: Adair Turner, Project Syndicate, April 2020
The process of monetary financing
How might monetary financing help the UK economy?
Risks / drawbacks of monetary financing
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