NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis

Ricardo Reis

NBER Working Paper No. 18730
Issued in January 2013
NBER Program(s):   EFG   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w18730

Published: 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 135-40, May.

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