How much fiscal backing must the ECB have? The euro area is not (yet) the Philippines

Ansgar Belke and Thorsten Polleit

International Economics, 2010, issue 124, 5-30

Abstract: This paper gives a detailed explanation of why a central bank without fiscal backing can lose control of inflation. Moreover, it argues that such danger emerged only recently for the ECB due to its increasing quasi-fiscal activities. Finally we argue that it might not generally be a good idea to provide fiscal backing for the ECB. That said, the backing of the central bank’s equity capital by fiscal policy (“fiscal backing”) appears to be a viable strategy if and when the central bank’s accounting losses are not related to the state of public finances. If, however, central bank portfolio losses are a direct outcome of deteriorating public finances, preserving the central bank’s equity capital may lead to a policy of high inflation, possibly above the ECB’s target level.

Keywords: Central Bank Independence; Central Bank Capital; Counterparty Risk; Repurchase Agreements; Collateral; Fiscal Backing; Liquidity; Haircuts (search for similar items in EconPapers)
JEL-codes: E42 E51 E58 E63 G32 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2010-q4-124-1

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