Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

46 Pages Posted: 22 Aug 2018 Last revised: 21 Feb 2019

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 Dallas

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: 2018-08-21

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 precrisis 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 (2018-08-21). FRB Atlanta Working Paper No. 2018-7. Available at SSRN: https://ssrn.com/abstract=3236582 or http://dx.doi.org/10.29338/wp2018-07

Michele Cavallo (Contact Author)

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

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Marco Del Negro

Federal Reserve Bank of New York ( email )

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W. Scott Frame

Federal Reserve Bank of Dallas ( email )

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Jamie Grasing

University of Maryland

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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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