chapter  10
Debt monetization, inflation, and the ‘neutral’ interest rate
Pages 19

The financial crisis of 2007-2009 that subsequently led to the European sovereign debt crisis that erupted violently in Spring 2010 has brought to the fore the urgent need to resort to new macroeconomic instruments. To be sure, some OECD economies find themselves in a difficult position insofar as, in the years to come, they will not be able to rely on expansionary fiscal policies to pull their economies out of recession owing to the fact that both their public and private sector are highly leveraged. In this scenario, several central banks, such as the US Fed, the European Central Bank (ECB), and the Bank of England have resorted, at least since 2008, to large-scale purchases of sovereign debt to try alleviating the financial cost to their Treasuries of the massive fiscal expansions that were engineered to counteract the collapse of private expenditure during the recent recession. It is well-documented by now that the Bank of Japan sporadically purchased government securities between 2001 and 2006 (Ueda, 2010). Likewise, the US Fed has purchased large quantities of mortgage-backed securities in order to provide liquidity to the private sector and compress term and risk premia.