I am currently working on a money supply simulation and there are some pieces of the puzzle that are still missing. One of them has to do with the purchase program of the ECB.
Say I am a pension fund which is holding a government bond which the ECB wants to purchase for 1000 EUR. With the purchase program the ECB creates money to purchase this bond but that money is digital central bank money which can not be transferred to my account. My question is, where does the money that I eventually receive om my account come from? How would that look when explained with the balance sheets of me (the pension fund), my bank and the ECB?
Thanks in advance,
Stef Kuypers
Well, let me try to answer this question in a very general way. Central Banks have the power to print money, physically or electronically. So, when that Central Bank commences an asset purchasing program, what it essentially does is that it'll buy marketable securities on the secondary market. Accordingly, those securities will increase assets in that Central Bank's balance sheet. That in effect is new money created. So, in return, the counterparty will receive cash. What happens then is that their (i.e., the counterparty's) cash balances increase, but at the same time, holdings of the bond/security will decline. As a result, the counterparty, who was once holding a non-saleable/ less liquid security in its stock of assets, would now have a highly liquid asset (i.e. cash), which they could use for transactions/ investment. Hope this explanation would be of some help!
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