Monetization of Public Debt:

Public debt is monetized by increasing the money supply.  In other words, debt monetisation results in an increase in circulating currency.  The government can regulate the level of interest rates in the market as it controls the money supply in the economy. Though debt monetization is the cheapest way of borrowing as it is not without excessive aggregate demand and inflation. Debt monetization is an easy way to raise revenue and is likely to be misused through excessive increase.  While the choice of the term structure of issues needs to be judged in terms of their effects, debt monetization should not be undertaken during inflationary period.  It has been felt that lengthening the debt at the time of refunding the issues tends to be restrictive and shortening the issues would be expansionary. Lengthening the debt issues raises the long-term rates as shown in the following diagram. 

In the diagram demand for money is represented on the horizontal axis and length of debt and interest rate is represented on the vertical axis.  It may be observed from the diagram that an increase in the length of debt from OD to OD' results in an increase in the money demand from OM to OM'. As a result, the rates of interest rise from r to r'. This is  because of the fact that holding of debt instead of money means purchasing liquidity. The investors will accept such a situation if they are offered higher rates. But higher rates in turn may exert restrictive influence on private investment which is welcome during a period of boom.  But very long term debt too would inject rigidity into the financial structure and may lack adequate liquidity in the economy which may have adverse effects. If the economy is experiencing a fall in employment, shortening the debt is the right policy. It all depends upon the immediate objectives of the stabilization policy which largely decides the debt management policy.