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Fiscal implications of central bank balance sheet policies

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  • Orphanides, Athanasios

Abstract

Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank's balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.

Suggested Citation

  • Orphanides, Athanasios, 2016. "Fiscal implications of central bank balance sheet policies," IMFS Working Paper Series 105, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
  • Handle: RePEc:zbw:imfswp:105
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    References listed on IDEAS

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    1. Charles WYPLOSZ, 2014. "The Eurozone crisis: A near-perfect case of mismanagement," Economia Marche / Journal of Applied Economics, Universita' Politecnica delle Marche (I) / Fondazione Aristide Merloni (I), vol. 0(1), pages 1-13, November.
    2. C.A. Sims, 1999. "The Precarious Fiscal Foundations of EMU," DNB Staff Reports (discontinued) 34, Netherlands Central Bank.
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    Cited by:

    1. Michael D. Bordo, 2017. "An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime," Economics Working Papers 17108, Hoover Institution, Stanford University.
    2. Athanasios Orphanides, 2017. "The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound," European Economy - Discussion Papers 2015 - 060, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Gros, Daniel, 2017. "Tightening by Stealth: Why keeping the balance sheet of the Federal Reserve constant is equivalent to a gradual exit," CEPS Papers 12652, Centre for European Policy Studies.
    4. Gros, Daniel, 2017. "Implications of the Expanding Use of Cash for Monetary Policy," CEPS Papers 12661, Centre for European Policy Studies.

    More about this item

    Keywords

    quantitative easing; lender of last resort; monetary financing; loss sharing; central bank independence; central bank accountability; central bank governance; rules vs discretion;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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