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Does the central bank ask the government to pay or are they rolled over?

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The bonds mature and pay the principal.

However, central banks tend to reinvest the principal, keeping their holding amounts relatively stable over time. This can be validated by looking at central bank balance sheet statistics.

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Opinion poll from focus economist asks similar question about Fed and ECB QE. Some respondents say QE will be phased out slowly others just say they will continue holding those assets for long time.

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Either of these two options can happen in principle. In fact there is even a third option where central bank just decides to retire the bond - meaning government never has to pay back or roll over (in some countries there might be legal constraints on this option but I am talking in general terms).

What will any central bank decide to do when that time comes will depend on the discretion of whoever is at particular time appointed to lead the central bank.

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The general idea is that the government pay the principal on the bond to the central bank and that money then disappears out of existence (i.e. the opposite of the money creation that happens at the beginning of the QE process). But in practice, this process is so painful that governments everywhere have simply been issuing more bonds and then doing ever more QE to compensate. This process has been going on for decades in Japan.

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  • $\begingroup$ Fiscal policy and credit conditions in the real economy are the reason QE cannot be reversed easily. The accounting customs do not cause "pain" to the government or central bank. The federal government issues a float of securities to cover the difference between spending and money collections from sources other than the sale of securities. The central bank does an asset swap with banks and non-banks to implement monetary policy. The federal govt and central bank would feel no pain reversing QE and fiscal stimulus if the economy would perform without these policy tools. $\endgroup$ Sep 30 at 16:45
  • $\begingroup$ @SytemTheory: Responding to that would not fit in a comment. So I'll just refer you to this: mickanomics.blogspot.com/2021/03/… $\endgroup$
    – Mick
    Oct 1 at 16:37
  • $\begingroup$ Regarding the article under the link above I agree with the bathtub analogy for loans and loan repayment. When the real estate bubble collapses, however, there are leveraged units in the economy without sufficient cash flow to repay debt. As these debt defaults impact the cash flow of other units there is a systemic debt default episode. The falling prices of real estate, falling income, and defaults on debt cause banks to destroy defaulted financial assets and liabilities in the money supply. If central bank purchases high quality assets from non-banks then QE stops bank money drain. $\endgroup$ Oct 1 at 19:21
  • $\begingroup$ I think according to your own logic reversing QE is only "painful" if there is no recovery in the credit system. There are two sources to fill the bathtub QE or the loan generating power of the bank credit system. This means if the real economy and credit sector begin to create net new money the central bank can unwind QE and there would be no net change in the bank money supply. The central bank and the aggregate bank can each be a source or sink of the instruments we recognize in the money supply statistics. $\endgroup$ Oct 1 at 19:44

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