Fiscal Implications of the Federal Reserve's Balance Sheet Normalization
46 Pages Posted: 22 Aug 2018 Last revised: 29 Apr 2020
Date Written: 2018-08-21
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: Suggested Citation