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Different Types of Central Bank Insolvency and the Central Role of Seignorage

Listed author(s):
  • Ricardo Reis

A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 21226.

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Date of creation: May 2015
Handle: RePEc:nbr:nberwo:21226
Note: ME
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  1. Marvin Goodfriend, 2014. "Monetary Policy as a Carry Trade," IMES Discussion Paper Series 14-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Ricardo Reis, 2009. "The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 722-753, 06.
  3. Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  4. Ricardo Reis, 2013. "The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis," American Economic Review, American Economic Association, vol. 103(3), pages 135-140, May.
  5. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, July.
  6. Buiter, Willem H., 2014. "Central Banks: Powerful, Political and Unaccountable?," CEPR Discussion Papers 10223, C.E.P.R. Discussion Papers.
  7. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  8. Seth Carpenter & Jane Ihrig & Elizabeth Klee & Daniel Quinn & Alexander Boote, 2015. "The Federal Reserve's Balance Sheet and Earnings: A Primer and Projections," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 237-283, March.
  9. Ricardo Reis, 2013. "Central Bank Design," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 17-44, Fall.
  10. Arthur Galego Mendes & Tiago Couto Berriel, "undated". "Central Bank Balance Sheet, Liquidity Trap, and Quantitative Easing," Textos para discussão 638, Department of Economics PUC-Rio (Brazil).
  11. Marvin Goodfriend, 2014. "Monetary Policy as a Carry Trade," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 32, pages 29-44, November.
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