Government bonds in the hands of the central bank and inflation. Is there a link?
One of the classic accusations made against expansionary monetary policies is that the monetization of public debt through the purchase of securities by the Central Bank leads to inflation. Moreover, the classic expansive move of the central bank takes place through the purchase of government bonds which it then keeps in its portfolio, and the consequent placing of money on the market, often accompanied by the control of interest rates on the government bonds themselves.
Will this statement be true in practice? Let's see a graph, presented by Robin Brooks, which presents the holding of government bonds of some advanced countries compared to GDP
Japan sees a particular situation: the Bank of Japan now owns 100% of GDP as public debt. An apparently extreme situation, which indicates a very expansive monetary policy. What about inflation? Nothing special:
We're under 4% down. As a counter-evidence let's take the United Kingdom, whose central bank not only owns only 30% of the public debt, but has actually conducted a real restrictive policy, putting a large chunk of its debt on the market and therefore absorbing liquidity. How's inflation going in the UK?
We have double-digit inflation, practically three times that of Japan, yet the Bank of England has pursued a tightening and rate-raising policy. Isn't it not working because inflation is linked to structural and external factors and not to monetary policy?
I'll leave this puzzle to you…
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The article Government bonds in the hands of the central bank and inflation. Is there a link? comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/titoli-di-stato-in-mano-alla-banca-centrale-e-inflazione-esiste-un-legame/ on Thu, 30 Mar 2023 07:00:21 +0000.