Outgoing FSA chairman Lord Turner argues central banks should not be afraid to use policy tools that go further than quantitative easing to fund government spending by printing money.
Lord Turner told the Financial Times use of “monetary financing” does not “absolutely definitively” lead to inflation.
He said: “I accept entirely this is a very dangerous thing to let out of the bag, that this is a medicine in small quantities but a poison in large quantities but there exist some circumstances in which it is appropriate to take that risk.”
Turner questioned whether monetary financing is “desperately dangerous because every pound of money financed turns into inflation.” He said: “Absolutely definitively not. There is no coherent rigorous bit of economics that takes you in that direction.”
But Turner added monetary financing was least likely to be needed in the UK, given the weakness of the economy could see more stimulus leading to higher inflation.
The FT explains monetary financing of public deficits involves the central bank creating money to fund a deficit permanently without having to sell government bonds, rather than QE where money is created to buy bonds temporarily.
Monetary financing also goes further than standard fiscal stimulus where governments borrow more to fund tax cuts or spending increases.
Lord Turner was one of the favourites to take over from Bank of England governor Sir Mervyn King, ahead of the shock appointment of Bank of Canada governor Mark Carney. Carney is to appear before MPs on Thursday to be questioned on his plans as Bank of England governor when he takes up the position in July.