Question

Can Monetization Really Reduce Government Indebtedness?

The question is not straightforward as it sounds.Monetization generally speaking would not change the overall stock of public sector debt. While this is true, it ignores the more bigger picture: when a central bank purchases a government debt with newly printed money the real overall stock of public sector debt would reduce.

Discuss: 1.Why do central banks monetize debt?

2. What the advantages and disadvantages of buying government bills domestically and internationally from investor's standpoint?

Answer 1

1.- central bank is the apex bank in any country . debt monetisation is a function performed by a central bank to finance the operations of the government . whenever a nations expenditure exceeds its revenue it results in government deficit which is financed by these central banks in order to overcome the deficit suffered by the government . in order to overcome the deficit the central bank purchases government operated or authorised securities in order to impart liquidity to the the government and in the market by purchasing the securities either by printing fresh currency and bringing it to the market and this is performed by the central bank by doing open market operations .

2. advantages of buying government securities -

i) there is low risk level in buying government operated securities since they are safe as protected by the government itself

ii) they are a good diversifier as they outshine even when other securities cannot

iii) they are liquid and highly reliable

iv) early redemption is also easy

disadvantages ----

i) generally interest paid is low and fixed .

ii) long term returns are also low on government securities

iii) they are affected by high inflation rates and affect the open market operations