Monetary Financing of Public Debt and Soft Budget Constraints Based on Experience of OECD Countries

The issue of monetary financing of public debt is one of the more important problems that monetary and fiscal authorities will face after the end of the COVID-19 pandemic. On the basis of many years of experience of OECD countries, this paper classifies the instruments of financial policy used by states to address the above-mentioned issue. These include: direct loans granted by the central bank to the government; government’s overdraft at the central bank; the purchase by the central bank of Treasury securities on the primary market; a negative nominal interest rate policy; quantitative requirements regarding credit allocation in the economy; banking sector liquidity requirements; reserve requirements; central development banking. It should be noted that some of the above-mentioned tools are not being currently used in a significant manner. This mainly concerns the direct loans granted to the government by the central bank. The paper tests the research hypothesis regarding the impact of the quasi-public debt management policy on the risk of the occurrence of soft budget constraint phenomenon. The analysis shows that under certain conditions, the risk is low. Reliable fiscal rules limiting the discretion of the fiscal authority may turn out to be of key importance.