How does the central bank reduce money supply by selling bonds if the buyer of the bonds can use bonds as currency?

External question — Economics Stack Exchange Author: Flux Original post: https://economics.stackexchange.com/questions/53456 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. When the central bank wants to reduce the money supply, it can sell bonds. That way, the money supply reduces by the amount paid for the bonds. The buyer will have bonds instead of cash. The bonds can be used as a currency (e.g. exchanging the bonds for goods and services, or using the bonds as collateral for borrowing money). If the bonds are indeed used as currency, wouldn't the bond sale by the central bank have failed in its objective to reduce money supply?

External answer — Economics Stack Exchange Author: 1muflon1 Original post: https://economics.stackexchange.com/a/53457 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. First, bonds do not count as money because they typically have too long maturity so they will not qualify even as broad money ( M3 ). However, if they would qualify as a money then it would still reduce money supply. If you count the bond as money then when the 1000 dollar bond was issued by government and bought by newly created central bank reserves then 2000 dollars will be created (bond with nominal value of 1000 and reserves worth 1000). When central bank sells the bond, it gets back the 1000 so money supply would drop by 1000.

External answer — Economics Stack Exchange Author: Stelium Original post: https://economics.stackexchange.com/a/53498 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. When bonds are sold by the central bank then existing bonds will have their value drop. For example, if you got a bond for 10% coupon at 10K and the central bank sold bonds now in the secondary market they are priced at 5K. This means that their coupon is now 20% because it has not changed in nominal terms. So, if the government wants money they have to issue bonds at 20% because if they issue them for less people will buy the existing ones instead. So, government and corporations that issue those bonds will tighten up their spendings and money will be more valuable. Using bonds as currency would make no difference at all.