The market value of a central bank

Ricardo Reis

No 1031, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: The fiscal capacity of a central bank is given by the present value of the seignorage from issuing banknotes plus the market value of its assets minus non-required reserves. Its size determines the solvency of a central bank and constrains unconventional monetary policy. We estimate this capacity for the US, as well as its elasticity with respect to inflation. To do so, we use balance-sheet information to measure the market value of central bank assets and how it will fall with inflation. We also estimate annual seignorage and how it varies with inflation and use options data for inflation to recover stochastic discount factors with which to value cash flows to the central bank. Our results suggest that the fiscal capacity of the Fed is large, but insensitive to plausible changes in inflation.

Date: 2015
New Economics Papers: this item is included in nep-mac and nep-mon
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