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Central Banks and Government Debt - Are central banks monetizing debt?

Johansson, Herman LU (2023) NEKH01 20222
Department of Economics
Abstract
This paper aims to determine if central banks have been monetizing the government debt.
That is the case if a higher government debt is associated with low short-term interest rate. The goal for central banks monetizing debt is to increase inflation, therefore decreasing the size of government debt. Three hypotheses are constructed. Firstly, higher government debt leads to lower short-term interest rates. Further developments are done with respect to the euro zone and the financial crisis. Fixed effects regressions are used to test the hypotheses. Results show no clear signs of central banks monetizing debt. The ECB had lower short-term interest rates when debt was over 90% of GDP after 2008, however it can be explained by a regime change... (More)
This paper aims to determine if central banks have been monetizing the government debt.
That is the case if a higher government debt is associated with low short-term interest rate. The goal for central banks monetizing debt is to increase inflation, therefore decreasing the size of government debt. Three hypotheses are constructed. Firstly, higher government debt leads to lower short-term interest rates. Further developments are done with respect to the euro zone and the financial crisis. Fixed effects regressions are used to test the hypotheses. Results show no clear signs of central banks monetizing debt. The ECB had lower short-term interest rates when debt was over 90% of GDP after 2008, however it can be explained by a regime change in monetary policy and the increased hedge the euro zone has against consumption risk due to its’ size. Specification of the non-linear relationship debt has with short-term interest rates makes results highly sensitive to specification of the regressions. More research is needed that tests more specifications and remove the effect monetary unions have on interest rates. (Less)
Please use this url to cite or link to this publication:
author
Johansson, Herman LU
supervisor
organization
course
NEKH01 20222
year
type
M2 - Bachelor Degree
subject
keywords
government debt, short-term interest rate, monetary policy, monetizing debt
language
English
id
9109254
date added to LUP
2023-03-28 09:00:43
date last changed
2023-03-28 09:00:43
@misc{9109254,
  abstract     = {{This paper aims to determine if central banks have been monetizing the government debt.
That is the case if a higher government debt is associated with low short-term interest rate. The goal for central banks monetizing debt is to increase inflation, therefore decreasing the size of government debt. Three hypotheses are constructed. Firstly, higher government debt leads to lower short-term interest rates. Further developments are done with respect to the euro zone and the financial crisis. Fixed effects regressions are used to test the hypotheses. Results show no clear signs of central banks monetizing debt. The ECB had lower short-term interest rates when debt was over 90% of GDP after 2008, however it can be explained by a regime change in monetary policy and the increased hedge the euro zone has against consumption risk due to its’ size. Specification of the non-linear relationship debt has with short-term interest rates makes results highly sensitive to specification of the regressions. More research is needed that tests more specifications and remove the effect monetary unions have on interest rates.}},
  author       = {{Johansson, Herman}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Central Banks and Government Debt - Are central banks monetizing debt?}},
  year         = {{2023}},
}