Finance, Forex and Investments

Relationship between central bank and State budget?

When State budget is deficit, does central bank hand money to the government? When central bank issue bonds (eg: withdraw money to fight inflation), do those money run to state budget? Does the Treasury involve?

Public Comments

1. If the State budget is in deficit, then the State issues bonds to the central bank and the central bank issues money to the State. The central bank doesn't issue bonds. It owns them. it can sell them in exchange for cash and that's one way to reduce liquidity in the money market. When the central bank sells bonds, the money it receives is the return of money it issued once upon a time. The money is destroyed by this transaction. More broadly, this is true whenever a debt is repaid. The central bank earns interest on the bonds it owns. In the US, it returns nearly all of this interest to the US Treasury.