ABSTRACT
This chapter argues that when there is an increase in the demand for money, the government, as the monopoly creator of money, can reduce its debt without increasing the rate of inflation or altering the level of interest rates. If the increase in the demand for money is enduring, this reduction in debt can persist without harmful effects on the economy. These effects are highly likely in the wake of a financial crisis. It follows that quantitative easing (QE) has almost certainly caused a significant reduction in the net debt of government and, while it continues, there is no plausible fiscal constraint. The governments that have engaged in QE have seen their costs of borrowing collapse despite, in many cases, continuing to run "huge" budget deficits. Japan is the most extreme example. After engaging in QE, Japan's government bond yields fell below 1 per cent, and are among the lowest of any country in history.
