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
Working Paper 2018-7
August 2018

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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 precrisis levels has little effect on the likelihood of net losses.

JEL classification: E58, E59, E69

Key words: central bank balance sheets, monetary policy, remittances

https://doi.org/10.29338/wp2018-07


The authors thank Jim Clouse, Deborah Leonard, Jane Ihrig, Brian Madigan, and Larry Mize for helpful comments. They also thank Khalela Francis, Margaret Sauer, and James Trevino for excellent research assistance. The views expressed herein are those of the authors and not necessarily those of their employers or any other entity within the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Michele Cavallo, Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551, michele.cavallo@frb.gov; Marco Del Negro, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, marco.delnegro@ny.frb.org; Scott Frame, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309, scott.frame@atl.frb.org; Jamie Grasing, University of Maryland, Department of Economics, Tydings Hall, 3114 Preinkert Drive, College Park, MD 20742, jgrasing@terpmail.umd.edu; Benjamin Malin, Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN 55401, benjamin.malin@mpls.frb.org; or Carlo Rosa. Carlo Rosa contributed to this paper while working at the Federal Reserve Bank of New York.
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