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The mystique surrounding the central bank’s balance sheet, applied to the European crisis

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  • Reis, Ricardo

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9326.

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Date of creation: Feb 2013
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Handle: RePEc:cpr:ceprdp:9326

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Keywords: central bank capital; Eurosystem; seignorage; sovereign debt crisis;

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  1. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  2. 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.
  3. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
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Cited by:
  1. Ricardo Reis, 2013. "Central Bank Design," NBER Working Papers 19187, National Bureau of Economic Research, Inc.
  2. Reis, Ricardo, 2013. "The Portuguese Slump and Crash and the Euro Crisis," CEPR Discussion Papers 9591, C.E.P.R. Discussion Papers.
  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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