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Fiscal implications of the Federal Reserve's balance sheet normalization

Author

Listed:
  • Michele Cavallo
  • Marco Del Negro
  • W. Scott Frame
  • Jamie Grasing
  • Benjamin A. Malin
  • Carlo Rosa

Abstract

The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to precrisis levels has little effect on the likelihood of net losses.

Suggested Citation

  • Michele Cavallo & Marco Del Negro & W. Scott Frame & Jamie Grasing & Benjamin A. Malin & Carlo Rosa, 2018. "Fiscal implications of the Federal Reserve's balance sheet normalization," Staff Reports 833, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:833
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    Cited by:

    1. Lorenzo Esposito & Giuseppe Mastromatteo, "undated". "In the Long Run We Are All Herd: On the Nature and Outcomes of the Beauty Contest," Economics Working Paper Archive wp_972, Levy Economics Institute.
    2. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Huixin Bi & Wenyi Shen & Shu-Chun Susan Yang, 2019. "Fiscal Implications of Interest Rate Normalization in the United States," IMF Working Papers 2019/090, International Monetary Fund.
    4. Sayuri Shirai & Eric Alexander Sugandi, 2019. "Cross-Border Portfolio Investment and Financial Markets Development in the Asia and Pacific Region," International Business Research, Canadian Center of Science and Education, vol. 12(5), pages 14-33, May.
    5. Sayuri Shirai & Eric Alexander Sugandi, 2018. "Cross- Border Portfolio Investment and Financial Integration in Asia and the Pacific Region," Working Papers id:12817, eSocialSciences.
    6. Shirai, Sayuri & Sugandi, Eric, 2018. "Cross-Border Portfolio Investment and Financial Integration in Asia and the Pacific Region," ADBI Working Papers 841, Asian Development Bank Institute.
    7. Hess Chung & Etienne Gagnon & Taisuke Nakata & Matthias Paustian & Bernd Schlusche & James Trevino & Diego Vilan & Wei Zheng, 2019. "Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit," Finance and Economics Discussion Series 2019-003, Board of Governors of the Federal Reserve System (U.S.).
    8. Mark A. Carlson & Stefania D'Amico & Cristina Fuentes-Albero & Bernd Schlusche & Paul R. Wood, 2020. "Issues in the Use of the Balance Sheet Tool," Finance and Economics Discussion Series 2020-071, Board of Governors of the Federal Reserve System (U.S.).
    9. Michal Franta & Tomas Holub & Branislav Saxa, 2018. "Balance Sheet Implications of the Czech National Bank's Exchange Rate Commitment," Working Papers 2018/10, Czech National Bank.
    10. Joerg Bibow, 2018. "Unconventional Monetary Policies and Central Bank Profits: Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis," Economics Working Paper Archive wp_916, Levy Economics Institute.
    11. Hess Chung & Etienne Gagnon & Taisuke Nakata & Matthias Paustian & Bernd Schlusche & James Trevino & Diego Vilán & Wei Zheng, 2020. "Monetary Policy Options at the Effective Lower Bound: Assessing the Federal Reserve’s Current Policy Toolkit," CARF F-Series CARF-F-483, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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    More about this item

    Keywords

    central bank balance sheets; monetary policy; remittances;
    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
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other

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