Working Paper: NBER ID: w18730
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; Balance Sheet; European Crisis; Inflation; Sovereign Debt
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 target (E52) | higher seignorage revenues (H69) |
| higher seignorage revenues (H69) | impact fiscal surpluses (H62) |
| central bank's balance sheet constraints (E58) | central bank's ability to generate dividends (E58) |
| central bank's monetary policy actions (E52) | influence sovereign spreads (G15) |
| institutional constraints (D02) | central bank's operational capabilities (E58) |