On potential debt monetisation for China's post-Covid recovery: what can we learn from the past?

A measure of the degree of debt monetisation is constructed for its impact on the business cycle, to be studied in a standard VAR model. Debt monetisation is hardly stimulative, as it raises public demand that crowds out almost as much demand from the private sector. However, it generates inflation,...

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Bibliographic Details
Published in:Economic issues (Stoke-on-Trent, England) England), 2021-09, Vol.26, p.39
Main Authors: Cao, Ziyi, Ou, Zhirong
Format: Article
Language:English
Subjects:
Business cycles
COVID-19
Crowds
Debt
Debt management
Disaster recovery
Economic policy
Inflation
Meaning
Private sector
Recovery
Regression analysis
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Summary:A measure of the degree of debt monetisation is constructed for its impact on the business cycle, to be studied in a standard VAR model. Debt monetisation is hardly stimulative, as it raises public demand that crowds out almost as much demand from the private sector. However, it generates inflation, presumably because of inflationary expectations. Nevertheless the impact of debt monetisation on business cycle dynamics is trivial, given the low efficiency of the monetary transmission mechanism. Unless policy proposals are for extraordinarily aggressive moves, or they are accompanied by monetary reforms which facilitate monetary transmission, the recent debate on debt monetisation, we argue, possesses more theoretical meaning than practical meaning for China's postCovid recovery.
ISSN:1363-7029
2514-5479