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Monetary finance as an innovative way to fund public investment: An appraisal

Author

Listed:
  • Alain Laurent

    (CREG - Centre de recherche en économie de Grenoble - UGA - Université Grenoble Alpes)

Abstract

With the aim to revive inflation after the global financial crisis much attention has been given to Quantitative Easing, the temporary purchase of public debt securities by the Central Bank. What is referred to as monetary finance is fundamentally different as it entails the commitment to roll over public debt indefinitely, leading to a permanent increase in the monetary base. Monetary finance would thus represent an innovative way to fund public investment necessary to the ecological transition, using the monetary power of the Central Bank without causing a rise of the public debt. We show the benefits of monetary finance should not be overestimated as it does not produce significant seigneuriage gains and is not likely to alleviate the interest burden for the public sector (Treasury and Central Bank) since money created will end up in excess reserves in the banking system. On the contrary, paying interests on bank excess reserves, which is necessary in order to avoid losing the grip on monetary policy, entails losses for the Central Bank. It means that monetary finance is a deadlock although not endangering Central Banks' activity.

Suggested Citation

  • Alain Laurent, 2025. "Monetary finance as an innovative way to fund public investment: An appraisal," Post-Print hal-05042101, HAL.
    • Handle: RePEc:hal:journl:hal-05042101
    DOI: 10.4324/9781003558187-13
    as

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