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The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis

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  • Ricardo Reis

Abstract

A central bank's resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. This is in spite of the mystique behind a central bank's balance sheet. 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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 3 (May)
Pages: 135-40

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:135-40

Note: DOI: 10.1257/aer.103.3.135
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  1. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  2. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  3. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
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Cited by:
  1. Reis, Ricardo, 2013. "The Portuguese Slump and Crash and the Euro Crisis," CEPR Discussion Papers 9591, C.E.P.R. Discussion Papers.
  2. Ricardo Reis, 2013. "Central Bank Design," NBER Working Papers 19187, National Bureau of Economic Research, Inc.
  3. David Greenlaw & James D. Hamilton & Peter Hooper & Frederic S. Mishkin, 2013. "Crunch Time: Fiscal Crises and the Role of Monetary Policy," NBER Working Papers 19297, National Bureau of Economic Research, Inc.

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