DP9326 The mystique surrounding the central bank?s balance sheet, applied to the European crisis

Author(s): Ricardo Reis
Publication Date: February 2013
Keyword(s): central bank capital, Eurosystem, seignorage, sovereign debt crisis
JEL(s): e58, f34
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9326

In spite of the mystique behind a central bank?s balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central bank?s main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway.