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

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  • Ricardo Reis

Abstract

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.

Suggested Citation

  • Ricardo Reis, 2015. "Different Types of Central Bank Insolvency and the Central Role of Seignorage," NBER Working Papers 21226, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21226
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    References listed on IDEAS

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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, June.
    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.
    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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    Citations

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    Cited by:

    1. Reis, Ricardo, 2016. "Funding quantitative easing to target inflation," LSE Research Online Documents on Economics 67883, London School of Economics and Political Science, LSE Library.
    2. Ricardo Reis, 2017. "QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 71-112, April.
    3. Ricardo Reis, 2016. "Can the Central Bank Alleviate Fiscal Burdens?," NBER Working Papers 23014, National Bureau of Economic Research, Inc.
    4. repec:eee:japwor:v:42:y:2017:i:c:p:1-11 is not listed on IDEAS
    5. M. Kasongo Kashama, 2016. "Helicopter money and debt-financed fiscal stimulus : one and the same thing ?," Economic Review, National Bank of Belgium, issue iii, pages 31-40, December.
    6. Harrison, Richard & Thomas, Ryland, 2019. "Monetary financing with interest-bearing money," Bank of England working papers 785, Bank of England.
    7. Diego Caballero & André Lucas & Bernd Schwaab & Xin Zhang, 2019. "Risk endogeneity at the lender/investor-of-last-resort," BIS Working Papers 766, Bank for International Settlements.
    8. Martin Hellwig, 2019. "Target-Falle oder Empörungsfalle? – Zur deutschen Diskussion um die Europäische Währungsunion," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2019_05, Max Planck Institute for Research on Collective Goods.
    9. Maarten van Rooij & Jakob de Haan, 2016. "Will helicopter money be spent? New evidence," DNB Working Papers 538, Netherlands Central Bank, Research Department.
    10. Bagus, Philipp & Howden, David, 2016. "Central Bank Balance Sheet Analysis," MPRA Paper 79801, University Library of Munich, Germany.
    11. Atsushi Tanaka, 2018. "Monetary Base Controllability after an Exit from Quantitative Easing," Discussion Paper Series 181, School of Economics, Kwansei Gakuin University, revised Jul 2018.
    12. Favaretto, Federico & Masciandaro, Donato, 2016. "Doves, hawks and pigeons: Behavioral monetary policy and interest rate inertia," Journal of Financial Stability, Elsevier, vol. 27(C), pages 50-58.
    13. Benigno, Pierpaolo & Nisticò, Salvatore, 2015. "Non-Neutrality of Open-Market Operations," CEPR Discussion Papers 10594, C.E.P.R. Discussion Papers.
    14. Atsushi Tanaka, 2019. "How Can a Central Bank Exit Quantitative Easing Without Rapidly Shrinking its Balance Sheet?," Discussion Paper Series 196, School of Economics, Kwansei Gakuin University.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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

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