This paper argues that in reserve currency issuing economies at the effective lower bound, outright transfers from the central bank to households are both more equitable and more effective in achieving monetary policy objectives than asset purchases or negative interest rates. It shows that concerns pertaining to central banks’ policy solvency and equity position can be addressed through a careful assessment of a central bank's loss absorbing capacity and, if need be, tiered reserve remuneration policies. It also spells out key differences to a debt or money financed fiscal stimulus, which are particularly pronounced in a currency union without a central fiscal capacity. The paper concludes by discussing broader institutional, political, and legal considerations.
Solvency, CentralBankEquity, Helicopter Money, Inequality
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The author would like to thank Shekhar Aiyar, Bas Bakker, Ulrich Bindseil, Marijn Bolhuis, Damien Capelle, Marco Casiraghi, Piet Philip Christiansen, Marco Gross, Maurizio Habib, Simon Gray, Vikram Haksar, Gerhard Illing, Stan Jourdan, Sylvio Kappes, Jens van’t Klooster, Tobias Krahnke, Marc Lavoie, Jesper Lindé, Eric Lonergan, William Oman, Brett Rayner, Neil Shenai, Arthur Sode, Manmohan Singh, Livio Stracca, Steffen Strodthoff, Robert
else equal, the reduction in centralbankequity resulting from the newly created liability could be replenished within five years with the current annual level of seigniorage alone. Traditionally, seigniorage is largely transferred to the governments of member states according to their capital key but nothing prevents the ECB and the Eurosystem’s central banks from withholding seigniorage to strengthen its equity position, which has indeed been common practice in recent years in the form of increased risk provisioning. 18
3.4 Distributional considerations and
Whereas some central bank derivatives and other contingent liabilities arise from anomalous circumstances, there are a number of positive reasons that explain their popularity. After analyzing the rationale for these operations, we stress that most of these operations, being off-balance sheet, increase the risk and reduce the transparency of central bank accounts. This in turn makes more difficult the assessment of the financial position of the monetary authority and, by implication, of the macroeconomic conditions of the country. To deal with this issue, we suggest a comprehensive portfolio approach that values, in an economic sense, all assets and liabilities of the central bank.
to construct the balance and the off-balance sheet accounts of the assumed central bank together with the prices and interest rates that were used in order to value the positions. We chose the British Pound as the domestic currency and the DM as the foreign currency. Table 2 is an estimate of the portfolio values of the central bank positions and, from these economic—rather than accounting—values, the true valuation of the centralbankequity is calculated. The economic values of the balance sheet items were calculated by converting all notional amounts into BP
volatility of financial institutions’ assets, σ A 2 ;
S = the spot exchange rate;
γ = the price of the government liabilities to the central bank.
Equation (9) depicts the relationships between the economic value of the various central bank assets and liabilities, and can be seen as the marked-to-market value of the centralbankequity. 21 The main advantage of the presentation in (9) is that it permits a direct evaluation of the evolution of central bank solvency and of the main determinants of such evolution. This is facilitated by the fact that (9
A loss of solvency increases central bank vulnerability, reducing the credibility of commitments to defend a nominal regime, including an exchange rate peg. This paper develops a methodology to assess central bank solvency and exposure to risk. The measure, based on Value-at-Risk, is frequently used to evaluate commercial risk. The paper emphasizes that the ability to sustain nominal commitments cannot be gauged by focusing only on selected accounts (such as reserves), but requires a comprehensive solvency and vulnerability analysis of the monetary authorities’ complete portfolio (including off-balance-sheet operations). The suggested measure has powerful reporting value and its disclosure could improve monitoring of sovereign solvency risk.
From a legal perspective, central banks may resemble corporations issuing shares, but centralbankequity is treated as other equity (AF519) by convention.
Listed financial derivatives, such as warrants, are sometimes considered to be securities ( BPM6 , paragraph 5.15).
Finally, the larger balance sheet of floor and tiered systems impose higher risks to central banks. Asset price fluctuations affect centralbanks’ equity positions, and although most central banks do not mark their balance sheets to markets, perceived losses can bring about political scrutiny and undesirable pressures.
How central banks decide to balance these trade-offs depends on country circumstances and constraints. The importance of decisions about clarity and simplicity, for instance, are functions of the central bank’s ability to communicate, and of
, “ Central Bank Vulnerability and the Credibility of Commitments: A Value-At-Risk Approach to Currency Crises, ” IMF Working Paper 98/65 ( Washington : International Monetary Fund ).
Ernhagen , Tomas , Magnus Versterlund , and Staffan Viotti , 2002 , “ CentralBanks’ Equity Needs, ” Bank of Sweden Economic Review , Vol. 2 , pp. 5 – 18 .
Flood , Robert , and Nancy Marion , 2002 , “ Holding International Reserves in an Era of High Capital Mobility, ” IMF Working Paper 02/62 ( Washington : International Monetary Fund ).