Why can't central banks just print money and turn it over to their national governments to generate inflation?

Ask an Economist

I don't understand why deflation, or even the zero-bound liquidity trap are not easily escaped by printing money.

I understand why deflation is debilitating, and why the zero-bound inhibits monetary policy. Why can't central banks just print money, and turn it over to their national governments to generate inflation? As a bonus, those governments would then have more money to spend - presumably to the benefit of their populations.

I do understand that high inflation carries its own problems (I remember the 1970s) but could a central bank facing perennially low interest rates not just run the presses until inflation began to approach its target level?


In the US at least, financing Govt expenditure/budget deficit by using more Federal Reserve notes is not an “usual” option (the way it is in India for example) is primarily because the central bank’s independence from the Treasury and the Govt’s commitment to let the central bank stay independent. Couple of factors that may re-inforce: (1) there is a constitutional limit on Govt borrowing be it by selling bonds or by borrowing from the FED (presumably that is what financing expenditure by printing money means) (2) the FED is by law charged with maintaining “price stability” (as opposed to a target inflation rate). My understanding is that this implies that monetary expansion must be gradual in a country like the U.S.

Answered by:
Dr. Sunanda Roy