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Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

Working Paper 747 | Published January 8, 2018

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Authors

Michele Cavallo Federal Reserve Board

Marco Del Negro Federal Reserve Bank of New York

W. Scott Frame Federal Reserve Bank of Atlanta

Jamie Grasing University of Maryland

Carlo Rosa

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.

Related: Liberty Street Economics article, January 9, 2018

DOI: https://doi.org/10.21034/wp.747