Debt monetisation

Governments typically have debt, and can either repay this debt with current income (e.g., from taxation), or by issuing new bonds. A government can either issue new bonds to the public directly or to the central bank. If it sells bonds to the central bank, the central bank will create the needed money to purchase the bonds by increasing the monetary base. Thus, debt monetisation is a two-step process whereby the government issues debt to finance its spending, and the central bank purchases the debt by ‘printing’ money.

Debt monetisation can lead to inflation because of the increase in the money supply. See inflation, quantitative easing.

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