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Can the Central Bank Alleviate Fiscal Burdens?

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  • 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 inuencing 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.

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  • Ricardo Reis, 2017. "Can the Central Bank Alleviate Fiscal Burdens?," CESifo Working Paper Series 6604, CESifo.
    • Handle: RePEc:ces:ceswps:_6604
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    Cited by:

    1. Ricardo Reis, 2019. "Central Banks Going Long," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.),Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 3, pages 043-081, Central Bank of Chile.
    2. van Wijnbergen, Sweder & Olijslagers, Stan & Petersen, Annelie & de Vette, Nander, 2018. "What Option Prices tell us about the ECB's Unconventional Monetary Policies," CEPR Discussion Papers 13371, C.E.P.R. Discussion Papers.
    3. Patrick Bolton & Haizhou Huang, 2017. "The Capital Structure of Nations," NBER Working Papers 23612, National Bureau of Economic Research, Inc.
    4. Ricardo Reis, 2017. "QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 71-112, April.
    5. Philippe Bacchetta & Elena Perazzi, 2021. "CBDC as Imperfect Substitute for Bank Deposits: A Macroeconomic Perspective," Swiss Finance Institute Research Paper Series 21-81, Swiss Finance Institute.
    6. Bletzinger, Tilman & von Thadden, Leopold, 2021. "Designing QE in a fiscally sound monetary union," European Economic Review, Elsevier, vol. 132(C).
    7. Corhay, Alexandre & Kind, Thilo & Kung, Howard & Morales, Gonzalo, 2021. "Discount rates, debt maturity, and the fiscal theory," SAFE Working Paper Series 323, Leibniz Institute for Financial Research SAFE.
    8. Williamson, Stephen D., 2019. "Interest on reserves, interbank lending, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 14-30.
    9. Hollmayr, Josef & Kühl, Michael, 2019. "Monetary–fiscal interaction and quantitative easing," Economics Letters, Elsevier, vol. 174(C), pages 200-207.
    10. N. Gregory Mankiw & Ricardo Reis, 2018. "Friedman's Presidential Address in the Evolution of Macroeconomic Thought," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 81-96, Winter.
    11. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    12. Mankiw, N Gregory, 2017. "Friedman’s Presidential Address in the Evolution of Macroeconomic Thought," CEPR Discussion Papers 12442, C.E.P.R. Discussion Papers.
    13. Bofinger, Peter & Ries, Mathias, 2017. "Excess saving and low interest rates: Theory and empirical evidence," CEPR Discussion Papers 12111, C.E.P.R. Discussion Papers.
    14. Bolton, Patrick & Huang, Haizhou, 2017. "The Capital Structure of Nations," CEPR Discussion Papers 12157, C.E.P.R. Discussion Papers.
    15. Allen-Coghlan, Matthew & McQuinn, Kieran & Varthalitis, Petros, 2020. "Sovereign debt after COVID-19: How the involvement of the ECB can impact the recovery path of a Member State," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    16. Shifu Jiang, 2022. "Optimal Credit, Monetary, and Fiscal Policy under Occasional Financial Frictions and the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 18(1), pages 151-197, March.
    17. Sascha Buetzer, 2022. "Advancing the Monetary Policy Toolkit through Outright Transfers," IMF Working Papers 2022/087, International Monetary Fund.
    18. Dimakopoulou, Vasiliki & Economides, George & Philippopoulos, Apostolis, 2022. "The ECB's policy, the Recovery Fund and the importance of trust and fiscal corrections: The case of Greece," Economic Modelling, Elsevier, vol. 112(C).
    19. Patrick Bolton & Haizhou Huang, 2018. "The Capital Structure of Nations [Welfare analysis of currency regimes with defaultable debts]," Review of Finance, European Finance Association, vol. 22(1), pages 45-82.
    20. George Economides & Dimitris Papageorgiou & Apostolis Philippopoulos, 2021. "Austerity, Assistance and Institutions: Lessons from the Greek Sovereign Debt Crisis," Open Economies Review, Springer, vol. 32(3), pages 435-478, July.
    21. Francisco Gomes Pereira, 2023. "Balance Sheet Expansionary Policies in the Euro Area: Macroeconomic Impacts and a Vulnerable versus Non-Vulnerable Comparison - A Bayesian Structural VAR Approach," Working Papers REM 2023/0259, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    22. Jorge Silva, 2020. "Impact of public and private sector external debt on economic growth: the case of Portugal," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 607-634, December.
    23. de Vette, Nander & Petersen, Annelie & Stan Olijslager, Stan & van Wijnbergen, Sweder, 2018. "What Option Prices tell us about the ECB's Unconventional Monetary Policies," CEPR Discussion Papers 13371, C.E.P.R. Discussion Papers.
    24. Jochem, Axel & Lecomte, Ernest, 2024. "Risky sovereign bond holdings by commercial banks in the euro area: Do safe assets availability and differences in bank funding costs play a role?," Discussion Papers 35/2024, Deutsche Bundesbank.

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    More about this item

    Keywords

    monetary policy; reserves; interest rates; quantitative easing;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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