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I have a question: If the govt generates 1% inflation by printing money that it uses to buy back debt, won't it have reduced nominal debt sufficiently so that even if inflation, interest rates and NGDP all increase by 1% then dept/GDP will still be lower after the end of the first year than before ? (Perhaps bought back debt still counts when calculating debt/GDP ?)

MF: you are basically right. But here's how I would do it: the higher inflation rate means a higher rate of printing money, and higher (real) profits at the central bank, which get given to the government, and reduce the deficit and reduces debt/GDP growth.

But the effect isn't very big. A 1ppt increase in inflation and money growth, times a (say) 5% base money/GDP ratio = 0.05% of GDP revenue from printing money.

The Bank of Canada has no power to raise the long-run inflation rate without fiscal support. It's the fiscal authority that must decide to increase the pace of nominal debt-issuance by 1% with the BoC following by maintaining a constant money-to-bond ratio.

Suppose instead that BoC unilaterally chooses to increase grow rate of money supply w/o fiscal support. It will eventually run out of bonds to monetize.

Just thought I'd throw that out there. :)

David: I totally disagree. A thought-experiment: suppose the BoC gives all its profits to the United Way, instead of to the Federal govt. But retains full operational independence. So the United Way is a couple of billion per year richer, and the Fed govt is a couple of billion a year poorer. Does the BoC need United Way "fiscal support" to raise the inflation target? I would say "no".

I can see some logic in what David says.

I looked at it this way:

Assume that the CB launches base money by buying up 1% of all privately held assets for newly printed money. There is no govt deficit or bond issuing and no RGDP growth. It then wants to drive 1% inflation. It can buy assets worth 1% of base money each year to do this. If my logic (and match) is correct then it will eventually have to own all the economies assets (might take a long time!). If it just gave the new money away ("fiscal support"?) it could avoid this situation.

I suspect that if RGDP growth > inflation (and real value of assets grows faster than inflation rate) this conclusion might not be true and the CB could drive inflation by asset purchase alone for ever ?

MF: lets think about an agricultural economy (land the only asset) with RGDP constant. Suppose an infinitely-lived landowning family decides to save all its rental income, and uses it to buy more land, year after year. Does it end up owning all the land, or does the price of land rise, relative to rents (i.e. the real rate of interest falls) so that its rental income buys it less and less extra land? Answer: it depends on whether the other landowners want to sell.

Now change the example slightly, so instead of an infinitely-lived landowning family, it's a family that owns a central bank, printing 2% more money every year to target 2% inflation.

Point being: you get exactly the same sorts of paradoxical results regardless of whether the original source of income comes from printing money or from something else. Suppose a government that did not own the central bank just kept on increasing its assets year after year.

Plus: it ain't gonna happen. Governments eventually end up spending any money they get, regardless where it came from!


I should have been clearer. I am assuming that the central bank can only engage in OMOs and is not permitted to purchase private assets.
This seems to me to be an empirically relevant restriction.

David: Ah! OK. But then if the CB is only permitted to buy ACME corporate bonds, and ACME refuses to issue more bonds, the CB is also stuck (even if ACME doesn't own the CB's profits).

I vaguely remember a few years back (seems like a century ago!) when the US debt/GDP ratio was getting very low, people worrying if the Fed would run out of US govt bonds to buy.

I see that in the real world where govt do run deficits that monetary policy is just an accounting error in terms of asset ownership.

However in unrealistic models where the CB buys up assets to generate inflation as long as it buys additional assets each year then the proportion of CB owned asset each year will increase - whether it will ever reach 100% depends on how fast real asset values increase as the quantity in private hands falls.

David's example is more restrictive. If the CB generates inflation only by buying back govt bonds and the inflation target means it buys them back at faster rate than the govt is issuing them then it will eventually run out of bonds to buy back. As the supply of govt bonds is small in comparison to total assets and probably not likely to be driven up in price as the qty in private hands falls it is probable that the CB (or govt) would be forced to rethink policy sooner rather than later in this case.

'However in unrealistic models where the CB buys up assets' = 'However in unrealistic models where the CB buys up PRIVATE assets'

I recall this one, https://jwmason.org/slackwire/borrowing-deb/, and a another similar to this covering debt dynamics. He also has one on state and local debt.

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