How can the Bank of England hold government debt through quantitative easing?

Question

In this article the Economist writes about the BoE:

"in the past decade the bank’s successive rounds of quantitative easing (qe), whereby it creates new money to buy bonds, have left it holding more than a third of the government’s entire stock of debt. That has, awkwardly, dragged it back into the realm of public-debt management."

From my understanding qe normally involves the buying of primarily government bonds. This would mean the BoE now has lots of UK government bonds. The bank of England is owned by the government so how is a government owning its own bond not just a promise to pay itself?

Answer 1

Yes, this effectively means that UK government owes itself money. While this might seem strange there is a reason why this is done. When UK government borrows from private individuals, firms or other governments it is borrowing already pre-existing money in the economy. However, when UK government borrows from BoE it borrows against newly created reserves and thus newly created money.

In this way government can relax its intertemporal budget constraint a bit. A government inter-temporal budget is given by:

$$G = B + \theta +T$$

where $G$ is government spending, $B$ is borrowing , $\theta$ monetary financing, and $T$ taxes net of interest payments. Although, debt is still involved BoE buying bonds is effectively theta, and this allows government to increase government spending without raising taxes $T$ or borrowing more from other sources for which government has to pay interest (in case of BoE holding UK debt the interest payments are just 'recycled' to the treasury).