When Does a Central Bank's Balance Sheet Require Fiscal Support?

Abstract

Using a simple general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance sheet support — a within-government transaction — is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank’s balance sheet is merged with that of the rest of the government.

Keywords: central bank’s balance sheet, solvency, monetary policy

JEL Classification: E58, E59