Transformation of Government Debt via Central Bank Purchases
The notion that government debt held by its own central bank can be cancelled is incorrect. When a central bank purchases government bonds, it creates corresponding liabilities to the private sector, such as banknotes and commercial bank reserves. Therefore, the debt is not eliminated but is instead transformed into a different form of liability within the financial system, where the government's debt to the central bank is matched by the central bank's liability to the private sector.
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
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A country's central bank purchases a large quantity of government bonds from commercial banks. A politician argues that this action effectively cancels that portion of the national debt, since the government now simply 'owes money to itself.' Which statement best analyzes the actual effect of this transaction on the financial system?
Transformation of Government Debt
When a country's central bank purchases government bonds from the private sector, the government's debt is effectively cancelled because one part of the government now owes money to another.
A country's central bank purchases a government bond from a commercial bank in the secondary market. Arrange the following events to accurately describe the transformation of this government liability within the financial system.