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When does a central bank's balance sheet require fiscal support?

Listed author(s):
  • Christopher Sims

    (Princeton University)

  • Marco Del Negro

    (Federal Reserve Bank of New York)

A central bank whose assets and liabilities are both nominal cannot produce a uniquely determined price level, no matter what policies it adopts, unless it is backed by a treasury with the power to tax. If it is so backed, the backing need not be visible in equilibrium; it can be a commitment by the treasury to act in circumstances that do not occur in equilibrium, and the action required in those circumstances need not be large. A central bank, though, can require fiscal transfers on the equilibrium path even when fiscal backing makes the price level unique. The likelihood of its needing such transfers increases when its balance sheet expands and when the duration of its assets diverges from that of its interest-bearing liabilities. The need for such transfers also depends on the strictness of its control of inflation and on the nature of demand for its non-interest bearing liabilities. A model calibrated to the current situation of the US Federal Reserve System suggests that the need for transfers is unlikely to arise, even if the Fed’s net worth at market value temporarily becomes negative.

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File URL: https://economicdynamics.org/meetpapers/2014/paper_763.pdf
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Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 763.

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Date of creation: 2014
Handle: RePEc:red:sed014:763
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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