From Krugman's macroeconomic textbook (highlighting is mine):

"In an open-market operation the Federal Reserve buys or sells some of the exist- ing stock of U.S. Treasury bills, normally through a transaction with commercial banks—banks that mainly make business loans, as opposed to home loans. The Fed never buys U.S. Treasury bills directly from the federal government. There’s a good reason for this: when central banks lend directly to the government, they are in effect printing money to finance the budget deficit. As we’ll see later in the book, this can be a route to disastrous levels of inflation."

But how does this indirectness prevent the central bank from printing money to finance the budget deficit? If the government can order the central bank to buy its bonds, then it can also order the central bank to buy its bonds indirectly, during its open market operations. I fail to see how this indirectness of buying bonds serves as a safeguard against abuse of of money printing press by the government.

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    $\begingroup$ The government can't order the central bank to buy bonds. $\endgroup$
    – user2852
    Jul 13, 2020 at 17:13
  • $\begingroup$ @ThisIsNoZaku If it's not just de-jure, but true de-facto, then it doesn't make sense to use indirectness of buying bonds to protect against government abusing money printing press. $\endgroup$ Jul 14, 2020 at 4:17

1 Answer 1


Even though central banks are part of the government they are in most developed countries independent, this is similar to way how courts operate. For example US government has Judicial Branch, where the supreme court justices are part of the government and appointed by president (the same way as chairman of Fed is) but this does not mean government can order supreme court or Fed around. Government could wait for Fed's chairman term to expire and appoint new one but it is expected that these appointees are technocrats and thus its not guaranteed they will act according to party line (i.e. line of the party currently in power).

In principle government could ask ('order') Fed to buy its bonds, however Fed could (and should) say no if it conflict with its dual mandate of price stability and full employment. Or they could say yes if they believe that is consistent with their mandate. This being said as Krugman points out in his book Fed wont go this route in normal times in order to keep it's 'distance' from the government. This really has no economic rationale but rather political one. The more entangled Fed (or any other central bank) gets with the government the more likely it is that there will be pressure for politicization of the institution.

This idea is made explicit by Fed in its FAQ, where it states:

Conducting transactions in the open market, rather than directly with the Treasury, supports the independence of the central bank in the conduct of monetary policy.

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    $\begingroup$ The legal reasoning in this answer is debatable. The U.S. Constitution mandates an independent judiciary, while the Fed came long after. The Fed is a “creature of Congress,” and has to follow the mandate that Congress sets. That includes operating procedures. $\endgroup$ Jul 13, 2020 at 20:36
  • $\begingroup$ @BrianRomanchuk I won’t dispute that even in my answer I mentioned that the Fed will try to observe its mandate as it has. However, I don’t think that there is any better analogy than to the court system. In the end US constitution gives some power over judicial branch to the congress as well and constitution can always be amended to give them more/change how they work- the same way as with the mandate - of course their independence is not equal in strength but for didactic purposes I think it’s a good analogy, although I am open to better suggestions $\endgroup$
    – 1muflon1
    Jul 13, 2020 at 20:44
  • $\begingroup$ "The more entangled Fed (or any other central bank) gets with the government the more likely it is that there will be pressure for politicization of the institution." Do you mean that it would be easier for economically uneducated public to see connection between central bank and the government and then reward with support populists who would pressure the central bank into abusing the money printing press? $\endgroup$ Jul 14, 2020 at 4:29
  • $\begingroup$ @user161005 no I don’t think that has anything to do with uneducated public. Its argued (and this is not economic argument - as mentioned in my post we are entering the field of political science and leaving economics behind) that the more closely some independent institution works with executive branch the more close relationship it develops and less independent it becomes. Again I will use analogy with judicial branch - if all constitutional court judges would be directly involved and discussing with the US president which laws or executive orders he/she should enact they would $\endgroup$
    – 1muflon1
    Jul 14, 2020 at 12:03
  • $\begingroup$ , most likely, over time become less independent of the executive branch. Also I am not trying to suggest that this one thing is what makes or breaks the central bank independence but for a modern central bank its independence is so cherished that anything that can be seen even slightly compromising would be avoided (even though in last 5-10 years we can observe that some of the unspoken rules are being eroded). The above argument might not be well articulated - since I am not political science major - but it is the argument you will hear if you work at central bank. $\endgroup$
    – 1muflon1
    Jul 14, 2020 at 12:12

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