What’s going on here is straightforward enough. QE doesn’t involve “printing money”, at least in the sense that people normally understand the word (i.e. something that doesn’t bear any interest). It replaces one, longer-term interest-bearing liability of the state held by the private sector (gilts) with another, much shorter-term instrument (reserves) that also bears interest. It therefore reduces the average maturity of the public sector’s liabilities, and with it the scope for “surprise” inflation to eat into their real value. Since the 1970s the combined effects of indexed debt issuance, and latterly QE, have materially reduced the fiscal returns to higher inflation. Some history: credible monetary regime matters more for inflation than government debt The absence of any clear target for monetary policy made the inflation of the 1970s more likely but, because the event was more spread out, its underlying causes harder to identify. There were probably several. Fiscal difficulties may have been one of them and, as we’ve seen, rapid inflation clearly had material effects on the real value of government debt (even if there was a subsequent price to pay). 14  See McLaren and Smith (2013) for further information on the impact of interest rate changes on the cash transfers between the APF and HMT. 15 See also Reis (2019) and Fukunaga et al. (2019) on the fiscal effects of higher inflation.
Whether inflation is actually an efficient tax – whether the economic harm it causes is worth the fiscal benefit – is far from clear. Certainly an extra bout of inflation that’s fully anticipated, and that therefore raises nominal interest rates and bond yields in advance, does very little to improve the government’s financial position, and even less now than in the past. That’s because the public sector has almost nothing in the way of zero-interest liabilities. If higher inflation and nominal growth pushed up the demand for physical cash the government might make a little more from that source. (The economic value of cash is higher than the cost of producing it. The difference, known as “seigniorage”, is a source of revenue for the public sector3). But the sums involved are 2 On their own, the instruments of policy are not a reliable way to discern whether there’s “monetary finance” of the government. But they may be more informative alongside other information. For example, if the central bank is easing policy in the face of clear inflationary pressure that might suggest it’s putting weight on some other objective: the joint behaviour of instrument and target can be informative. It might also tell you something if the central bank eased policy and, at the same time, the authorities introduced restrictions to limit or prevent people from selling the government’s debt. That way, the central bank might be able to reduce borrowing costs for the government alone – i.e.