Government spending has two immediate and direct macro effects. It:heteconomist
adds to the net financial assets held by non-government;
creates income equal to the amount spent.
This is the case whether the central bank is (A) permitted to purchase government bonds directly from the fiscal authority (‘overt monetary financing’) or instead (B) is required to buy them from the private sector (currently the procedure under “normal” circumstances in many countries). It is also true if (C) the government simply spends without issuing bonds and pays its policy rate (which can be zero) on reserve balances.
Procedure B is far more convoluted than either of the alternatives, for no real public purpose. An earlier post traces through six steps (identified by Scott Fullwiler) that are involved when the US government requires itself to match net spending with bond sales to the private sector. The effects are presented in terms of simplified balance sheets of government agencies (the central bank and fiscal authority) and members of the non-government (primary dealers, commercial banks, spending recipients).…
‘Overt Monetary Financing’ in Terms of Simplicity and Transparency