Working Paper: CEPR ID: DP9326
Authors: Ricardo Reis
Abstract: In spite of the mystique behind a central bank?s balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central bank?s main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway.
Keywords: central bank capital; eurosystem; seignorage; sovereign debt crisis
JEL Codes: E58; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central Bank's ability to raise inflation targets (E52) | Fiscal Surpluses (H62) |
| Central Bank's ability to raise inflation targets (E52) | Debt Repayment (H63) |
| Inflation Targets (E31) | Nominal GDP Growth (O49) |
| Central Bank's Balance Sheet (E58) | Resource Redistribution Across Regions (R23) |
| Central Bank's Balance Sheet (E58) | Statutory Guidelines (K36) |
| Central Bank's Role During Financial Crises (E58) | Higher Repayment Equilibria (D59) |
| Central Bank Raises Inflation Target (E52) | Resources to Alleviate Sovereign Debt Issues (F34) |