Finance and Economics Discussion Series (FEDS)

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January 2018

Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

Michele Cavallo, Marco Del Negro, W. Scott Frame, Jamie Grasing, Benjamin A. Malin, and Carlo Rosa

Abstract:

The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.

Accessible materials (.zip)

Keywords: Central bank balance sheets, Monetary policy, Remittances

DOI: https://doi.org/10.17016/FEDS.2018.002

PDF: Full Paper

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Last Update: January 09, 2020