Although there are some crucial and subtle differences, central bank emergency policies during the peak the COVID-19 pandemic are thought to be very comparable to debt monetisation. The act of a government borrowing funds, for example, overdraft from the central bank to pay for public expenditures instead of tax increases or bond sales to private investors is termed as debt or finance monetisation. When central banks purchase government debt, they are essentially creating fresh money.
Money production to boost the available supply of money is termed as printing of money. Printing of money includes debt monetisation which involves borrowing from the central bank to pay for government expenses – this effectively produces new money. In fact, printing of money is not only about printing new currency, but debt monetisation is a form of printing money.
In summary, printing of money refers to the money creation where money supply is increased, while debt monetisation involves the financing of government expenditures by borrowing from the central bank. Again, security printing or paper money printing is the commonest form of printing of money. Furthermore, quantitative easing involves the lowering of interest rates and modern monetary theory advocates for the creation of new money to finance government purchases are part of printing of money.
This procedure of debt monetisation is frequently referred to informally and disparagingly as printing money or money creation. Many nations forbid it because they view it as hazardous since it could lead to inflation that spirals out of control. In order to avoid printing excessive amounts of new currency, central banks frequently monitor the Consumer Price Index to prevent the creation of new money.
Governments are permitted to use debt monetisation financing strategy to fund expenditure items during pandemic era but it has to be backed by law. It is easily adopted by governments to circumvent the law to get the central banks to support the government operations in times of unforeseen situation. This approach requires the consultation, cooperation, and collaboration of the central bank and government.
The writer is an Associate Professor of Finance, Andrews University, USA