The amortization of public debt is the return to maturity by the State of the capital that natural or legal persons have lent to it.
In general, when the public sector issues public debt , it has a maturity that will depend on the financing needs and that may be through Treasury bills , bonds and obligations of the state. The amortization of public debt can be due to several circumstances, either due to the mere repayment on maturity of the debt, or due to a general policy of reducing public indebtedness.
The amortization of public indebtedness is closely related to the nature of the bonds and obligations that the state has issued, so that it will only be returned in those government securities that are amortizable, that is, they have a specific and clear maturity, since they do not all public debt is amortized through the return of the principal borrowed, but the state is issuing coupons with which to pay interest on the principal, without it ever being returned. This is what is known as perpetual indebtedness.
The amortization of public debt as an instrument of monetary policy
The public debt is not only a way to finance the public needs and budgets of the administrations, but it is also an important element in terms of the monetary policy of the states. Through the issuance and amortization of public debt , the state can reduce or increase the monetary mass in the market:
In a situation of general inflation characterized by having excess money in the market, the state can issue public debt to reduce the money supply in the market and thus reduce the amount of money in circulation.
On the contrary, in a situation of deflation , the state must amortize public debt (buy securities) in order to flood the liquidity market with money.