Different types of central bank insolvency and the central role of seignorage

Ricardo Reis

No 10693, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.

Keywords: Central bank capital; Fiscal support; Monetary policy (search for similar items in EconPapers)
JEL-codes: E42 E58 E59 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (59)

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Working Paper: Different Types of Central Bank Insolvency and the Central Role of Seignorage (2015)
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