Working Paper: NBER ID: w21226
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; insolvency; fiscal support; seignorage
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 solvency (E58) |
| Ponzi scheme on reserves (G23) | Central bank insolvency (G33) |
| Central bank insolvency (F65) | Infinite price level (E31) |
| Fiscal support through dividend rule (G35) | Avoiding insolvency (G33) |
| Fiscal support (E62) | Period insolvency (G33) |
| Fiscal support (E62) | Rule insolvency (G33) |
| Fiscal support (E62) | Intertemporal insolvency (G33) |
| Present value of seignorage (E49) | Intertemporal solvency (D15) |