Thread by @dugalira

1/n A thread on some of the points Raghuram Rajan makes on monetisation:

1) The government’s priority should be to protect the economy and spend what’s needed. It’s inability to finance itself or fears of monetisation should not be a constraint....

1-A) That’s not to say fiscal deficits don’t matter. Medium term roadmap must be clear else investors and rating agencies will take “fright.”

He suggests following NK Singh committee advice, using medium term debt targets and an independent fiscal council. 2/n

In normal times, direct monetisation would be inflationary. However in abnormal times, the excess Govt spending undertaken after monetisation will not lead to fresh credit being created as banks are risk averse.

Hence, it gets parked back at the RBI reverse repo window. 3/n

As such, at a time when demand is depressed and the environment is disinflationary, inflation should not be a “central worry.” 4/n

Monetisation is not “free”. Yes, the government can get access to funds quickly but it will end up paying in a couple of ways.

First, RBI pays reverse repo rate since much of the additional spending will come back via banks to the RBI. That impacts RBI dividend to Govt. 5/n

Second, since banks earn just 3.75% instead of, say, 6% they would have earned on Govt bond investments, to that extent dividends from PSU banks to Govt are impacted.

Rajan says that MMT-ers are wrong to think that central bank financing of Govt can be ignored. The consolidated liabilities of Govt + central bank have to be seen as sustainable, else confidence in both money and government debt will collapse.

Advices clear medium term policies.

Some of his points in this article below. (End of thread) bloombergquint.com/coronavirus-ou…