Two types of debt monetization (and one misconception)

Source: EconLog
by Scott Sumner

“I see a lot of discussion of Fed ‘debt monetization,’ and yet it’s not exactly clear what that term means. Here I’ll discuss two types of debt monetization, and a third policy that is often wrongly viewed as debt monetization. The best example of debt monetization is a large, one-time increase in high-powered money, which the central bank uses to purchase interest-bearing government bonds. High-powered money is base money that pays no interest, such as currency and zero interest bank reserves. This policy produces a one-time increase in the price level, but no persistent increase in the rate of inflation. A second type of debt monetization involves a persistent increase in the rate of inflation, such as we saw during the 1960s and 1970s.” (07/13/21)