Exploring the depth of unconventional Asian central bank easing | Item

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And, direct deficit financing

In reality, full QE also has only a limited impact on the central bank’s balance sheet, with the exception of perpetual purchases, eventually direct purchases of fixed income assets mature and liquidity will return. at the central bank. To overcome this loophole, the proceeds from maturing assets were often reinvested, which maintained the expansion of the balance sheet until it was no longer needed, and thus an even stronger signal of expansionary intent to investors. market players.

So far, no developed central bank has embarked on direct financing of the monetary deficit, but give it time… This is an even more obvious form of money printing and simply pays the loans public direct to primary markets with printed currency. At this point, the central bank abandons any pretense of independence and simply becomes a tool of government, printing cash to pay for deficit spending by the government. Monetary policy becomes indistinguishable from fiscal policy.

Currently, that appears to be a step too far, even for most central banks in developed markets. But with their more limited fiscal options, even in these unusual times, some emerging market central banks appear to be trying to compensate for their limited fiscal leeway by leaning in the direction of such direct monetary financing, notably through temporary “advances”. . to the government.

Certain central banks in emerging markets seem to be trying to compensate for their more limited budgetary room for maneuver by leaning in particular towards direct financing of the deficit, via temporary “advances” to the government.

What looks like a temporary advance today can end up being long beyond any reasonable concept of short-term cash flow management, which is how these measures are currently described. And while this direct financing does not directly lower gross government deficits or their debt stack relative to GDP, it internalizes them, turning the central bank into the monetary arm of government, and in turn, reducing the net deficit. / net debt. to GDP.

In the current market climate, where almost anything seems possible, central banks in Asia seem to be doing at least with “lite” versions of QE and, in some cases, direct financing of the monetary deficit.

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