Working Paper: CEPR ID: DP10693
Authors: Ricardo Reis
Abstract: A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.
Keywords: central bank capital; fiscal support; monetary policy
JEL Codes: E42; E58; E59
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Support (E62) | Central Bank Insolvency (F65) |
| Seignorage (E42) | Central Bank Insolvency (F65) |
| Fiscal Support (E62) | Solvency of Central Bank (E58) |
| Period Insolvency (G33) | Fiscal Support (E62) |
| Rule Insolvency (G33) | Fiscal Support (E62) |
| Intertemporal Insolvency (G33) | Fiscal Support (E62) |
| Central Bank Financial Practices (E58) | Price Level Dynamics (E31) |