Government Debt Financing Sustainability and Its Interaction with Quantitative Easing - a Case of US, UK and Japan in 2000-2014

Abstract

Government Debt Financing Sustainability and its Interaction with Quantitative Easinga Case of US, UK and Japan in 2000-2014The paper examines the quantitative easing as a policy contributing to government debt sustainability in the context of government debt cycle. Thus, the emphasis is primarily not put on the rescue of fi nancial system after the collapse of Lehman Brothers. Instead, the attention is paid to a role of central bank as a lender of last resort in government bond markets and quasi-fi scal motivation of the quantitative easing programs. The theoretical part of the analysis defi nes quasi-fi scally motivated QE program, government adjusted net debt position plus its determinants and a rate of debt monetization. Empirical analysis focuses on the case of three large economies -United States, United Kingdom and Japan, empirical defi nition of quasi-fi scally motivated quantitative easing, net debt position of their governments as well as the explanation of signifi cant empirical relationships between its determinants. The paper concludes that the most important factor infl uencing net debt position dynamics is economic growth which cannot be relied on in bust phase of debt cycle. Thus, the decisive role is played by quantitative easing and related interest transmission channel as remaining factor infl uencing dynamics of government fi nancial assets and liabilities.