The Mystique Surrounding the Central Bank’s Balance Sheet, Applied to the European Crisis

21 Pages Posted: 5 Feb 2013

See all articles by Ricardo Reis

Ricardo Reis

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 2013

Abstract

In spite of the mystique behind a central bank’s 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 bank’s 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

Reis, Ricardo A.M.R., The Mystique Surrounding the Central Bank’s Balance Sheet, Applied to the European Crisis (February 2013). CEPR Discussion Paper No. DP9326. Available at SSRN: https://ssrn.com/abstract=2212002

Ricardo A.M.R. Reis (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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