Refet Gürkaynak, Deborah Lucas, 14 May 2020

The current macroeconomic policy scene in advanced economies is dominated by three interrelated challenges: rapidly meeting the unprecedented spending needs to respond to the COVID-19 crisis, while holding government debt to a sustainable level and avoiding deflation. This column argues that monetising some of the pandemic-related debt would be the best way to address all three issues simultaneously, even if it risks some future above-target inflation. It proposes a particular mechanism for debt monetisation, with the proceeds used to fund the partial replacement of lost wages through the banking system. The proposed mechanism effectively monetizes the cost of the programme, in contrast to central banks' current debt purchase programmes which, for the most part, have not yet resulted in monetisation.   


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