Thank you so much.

You are right in that the Central Bank can write-off / forgive the bonds it holds. However, this does not change much practically and causes more damage than good.

This does not change things because the debt that was held in the central bank is now simply held in the economy - meaning that the currency devalues as there is now more of it flowing within the economy that doesn't have to be channeled back to repayment of debt. This will also lead to inflation. Now it can be argued that the central bank simply forgive part of the debt at a time, this would also do more harm as it violates the essential underlying trust in the government at the economy as a whole (which is the independence of a central bank from the government). A central bank simply forgiving the debt would push interest rates up on bonds as investors will now fear that the government will start to pay off debt with simply more borrowing from central bank (which in turn will forgive the debt) - decreasing the value of the currency.

The central bank ownership of debt also means something practically as during times of economic boom, the central bank should normally sell these bonds bank into the market to investors, not just hold the bonds till maturity. This is one of the monetary policy tools that the central bank has.



I write on economics, history and data science.

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