The advantages and disadvantages of relying solely on currency financing to fund government expenditures

Abstract

The traditional way to ensure enough government funding is raising taxes. Another alternative option is relying solely on currency financing to fund government expenditures, which is mostly discussed by economists and policy makers. The article introduces some advantages and disadvantages about it and seeks to provide a comprehensive understanding of the matter for the readers. On the one hand, currency financing increases the government’s flexibility, alleviates economic inequality, reduces citizens’ tax burden, improves the innovation capacity of small and medium-sized enterprises, and helps economic recovery. On the other hand, it exerts some negative impacts on the economy, such as inflation, reduction in central bank independence, and trade imbalances. Therefore, both advantages and disadvantages of currency financing should be taken into account before the government makes a decision.