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What is monetization of debt? Why is the government’ ability to finance deficit by monetization limited?

What is monetization of debt? Why is the government’ ability to finance deficit by monetization limited?

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In simple words, debt monetization refers to the paying off government debt with the help of printing more money and increasing the monetary base. After printing the money, the government can buy the bonds issued by it earlier and reduce its debt. So, debt monetization is paying off the government debt by printing more money.

The government's ability to finance debt with the help of monetization is limited. Increasing the money supply puts inflationary pressure on the economy. If money supply growth is higher as compared to the growth in real output, there will be high inflation and wealth of people will be eroded. Therefore, the government can only monetize debt in a limited way.

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