Working Paper: NBER ID: w23014
Authors: Ricardo Reis
Abstract: Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by influencing different terms in the government resource constraint. It discusses five channels: (i) how inflation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited.
Keywords: central bank; fiscal burden; public debt; seignorage; inflation
JEL Codes: E52; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher inflation (E31) | Lower real burden of public debt (H69) |
| Central bank actions in currency issuance (E58) | Fiscal benefits (H39) |
| Recognition of central bank liabilities (E42) | Altered perceived fiscal burden (H31) |
| Income risks from central bank asset holdings (E44) | Fiscal burdens (H69) |
| Central banks redistribute fiscal burdens (E58) | Across regions in a currency union (F36) |