Monetization of Fiscal Deficits and COVID-19: A Primer

Monetization--also known as "money-financed fiscal programs" or "money-printing"--occurs when a government finances itself by issuing currency or other non-interest-bearing liabilities, such as bank reserves. It poses real risks--potentially excessive inflation and encroachment on central-bank independence--and some paint it as a relic of a bygone era. The onset of the COVID-19 crisis, however, forced governments to spend heavily to combat the considerable economic and public health impacts. As government deficits climbed, monetization re-entered the conversation as a way to avoid the massive debt burdens that some nations may face. This paper describes how monetization works, provides key historical examples, and examines recent central-bank measures. Based on our definition, much of what many are calling monetization today--in particular, central banks directly buying massive amounts of their own government's bonds--is not necessarily monetization. To our knowledge, no central bank during the COVID-19 crisis took an action that meets our definition or explicitly stated that it was conducting monetization.