Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

47 Pages Posted: 11 Jan 2018

See all articles by Michele Cavallo

Michele Cavallo

Board of Governors of the Federal Reserve System - Division of Monetary Affairs

Marco Del Negro

Federal Reserve Bank of New York

W. Scott Frame

Federal Reserve Bank of Atlanta

Jamie Grasing

University of Maryland

Ben Malin

Federal Reserve Bank of Minneapolis

Carlo Rosa

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: 2018-01-08

Abstract

The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.

Keywords: Central bank balance sheets, Monetary policy, Remittances

JEL Classification: E58, E59, E69

Suggested Citation

Cavallo, Michele and Del Negro, Marco and Frame, W. Scott and Grasing, Jamie and Malin, Benjamin A. and Rosa, Carlo, Fiscal Implications of the Federal Reserve's Balance Sheet Normalization (2018-01-08). FEDS Working Paper No. 2018-002. Available at SSRN: https://ssrn.com/abstract=3100061 or http://dx.doi.org/10.17016/FEDS.2018.002

Michele Cavallo (Contact Author)

Board of Governors of the Federal Reserve System - Division of Monetary Affairs ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
+1 (202) 452-2607 (Phone)

Marco Del Negro

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

W. Scott Frame

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404 498 8783 (Phone)
404 498 8810 (Fax)

Jamie Grasing

University of Maryland

College Park
College Park, MD 20742
United States

Benjamin A. Malin

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Carlo Rosa

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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