Central Banks Cancelling Government Debt Is No Panacea

Recently, more than a hundred European economists, including such luminaries as Thomas Piketty, called for the European Central Bank to write off a chunk of government debt that it holds. The idea of central banks cancelling government bonds they have come to hold as a result of their large-scale quantitative easing has a certain superficial appeal. However, it reflects a fundamental misunderstanding of what QE is, and diverts attention from considering more fruitful ways in which monetary and fiscal policy can cooperate.  

Since the global financial crisis and now in response to the Covid-19 recession, governments have accumulated a huge pile of debt and central banks, by doing QE, have come to hold a big slice of it. The central bank, while operating independently, is part of the ‘consolidated government’, so the bonds it holds sit on both sides of the latter’s balance sheet. Debt cancellation would seem to kill two birds with one stone: getting rid of a chunk of government debt, thus creating more ‘fiscal space’, and helping the central bank unwind its QE-bloated balance sheet, freeing up room for monetary policy. Were things that simple...