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A few years ago in the US, everyone who filed taxes received a check for $1000.

If this method of inflation was logistically more feasible, how could this be used in monetary policy, and what existing monetary controls would it affect?

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  • $\begingroup$ What do you mean by inflation? By inflation people usually mean increase in prices. Perhaps you mean increase in money supply. However in this case I believe that this was merely a transfer between the US treasury and the consumers, so one might argue that no new money was created. (I have to admit I am uncertain whether the wealth of the US treasury is counted towards the money supply.) $\endgroup$ – Giskard Aug 9 '15 at 13:29
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    $\begingroup$ @denesp It's not - for all intents and purposes the money supply today is the sum of all bank deposits. The tax refund the US govt performed is best regarded as a redistribution of money between tax payers - a one off 'positive income tax' payment if you like. $\endgroup$ – Lumi Aug 9 '15 at 16:34
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This is only inflationary if the monetary authority monetizes the borrowing. If the Treasury borrows $1000 on the open market by issuing a bond and sends the money to a consumer, no money has been created— it has simply been borrowed from one person and given to another. However, if the monetary authority purchases that bond (swapping base money for the bond), then it is indeed inflationary, as the amount of money now in circulation has increased.

As far as its role in monetary policy— the decision of whether to monetize fiscal authority borrowing is part of standard monetary policy. The phrase you'll often hear is, "the monetary authority moves last," which reflects the fact that the monetary authority can either accommodate spending by monetizing it, increasing inflation, or do nothing, which has the effect of increasing interest rates on government borrowing.

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  • $\begingroup$ How does this contrast with the current means of increasing the money supply? $\endgroup$ – goodguys_activate Aug 9 '15 at 13:52
  • $\begingroup$ @LamonteCristo— see edit $\endgroup$ – dismalscience Aug 9 '15 at 13:58
  • $\begingroup$ it has simply been borrowed from one person and given to another — I thought that borrowing did create money? Could you clarify? $\endgroup$ – gerrit Aug 18 '15 at 23:58
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    $\begingroup$ @gerrit— Your question is a bit out-of-scope and thus might justify a stand-alone question, but: borrowing/lending can, but does not always, create money. Whether or not it does has to do with whether the lending is intermediated by the banking system (i.e., if I borrow $100 from you, practically speaking nobody will let you treat that as a financial asset, and it thus won't result in money creation) and whether the monetary authority chooses to accommodate more lending, as noted above. A good overview: bankofengland.co.uk/publications/Documents/quarterlybulletin/… $\endgroup$ – dismalscience Aug 19 '15 at 0:33

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