The Mystique Surrounding the Central Banks Balance Sheet, Applied to the European Crisis
21 Pages Posted: 5 Feb 2013
Date Written: February 2013
In spite of the mystique behind a central banks balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central banks main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway.
Keywords: central bank capital, Eurosystem, seignorage, sovereign debt crisis
JEL Classification: E58, F34
Suggested Citation: Suggested Citation