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American Economic Review: Vol. 103 No. 3 (May 2013)

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

Article Citation

Reis, Ricardo. 2013. "The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis." American Economic Review, 103(3): 135-40.

DOI: 10.1257/aer.103.3.135

Abstract

A central bank's resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. This is in spite of the mystique behind a central bank's balance sheet. 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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Authors

Reis, Ricardo (Columbia U)

JEL Classifications

E52: Monetary Policy
E58: Central Banks and Their Policies


American Economic Review


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