Central Banks as Fiscal and Financial Agents of the State

This paper discusses six issues of interest to central banks and those interested in the technical and political economy issues associated with central banks. First, the central bank is a fiscal and financial agent of the State. Its beneficial owner should be the Treasury or Finance Ministry of the central government or, in some federations, both the central government and state or cantonal governments. The central bank’s accounts should therefore be consolidated with those of the government. The at-times bizarre formal ownership structures (the Federal Reserve System, the Swiss National Bank and the Bank of Japan are examples) should be ignored and preferably terminated and replaced with 100 percent ownership by the beneficial owner(s). Second, some central banks (including the Fed) face an asymmetric treatment of profits and losses by their beneficial owner. This should be terminated and replaced by a symmetric treatment of profits and losses or an income sharing and recapitalization agreement between the central bank and the Treasury. Third, central bank money is a liability in name only. This has important implications for the intertemporal budget constraints of the central bank and the consolidated State. Fourth, the Fiscal Theory of the Price Level is a logical fallacy. Fifth, the United States is on the way to fiscal dominance, even if the Fed remains operationally independent. The financial stability mandate of the central bank may force it to monetize unsustainable government debt and deficits on a scale that is incompatible with its price stability mandate. Sixth, it is time to eliminate the effective lower bound on nominal interest rates by abolishing fiat coin and paper currency and replacing it with an interest-bearing retail central bank digital currency that can be used in both offline and online transactions and does not have a cap on the size of its accounts or transactions.