Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

Cavallo, Michele; Del Negro, Marco; Frame, W. Scott; Grasing, Jamie; Malin, Benjamin A.; Rosa, Carlo

doi:10.17016/FEDS.2018.002

Working Paper

Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

Abstract: 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 pre-crisis levels has little effect on the likelihood of net losses.

Keywords: Central bank balance sheets; Monetary policy; Remittances;

JEL Classification: E58; E59; E69;

https://doi.org/10.17016/FEDS.2018.002