Fiscal Consequences of Paying Interest on Reserves

Abstract

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Shotgun Wedding: Fiscal and Monetary Policy

“…In a richer model with long-term debt, the left-hand side term represents the real value of the central bank's portfolio of bonds. Bassetto and Messer (2013) of value and that are remunerated at the market interest rate. In this case, the mismatch between short-term interest-bearing liabilities and long-term bonds can imply that the left-hand side of (47) turns negative in an adverse scenario, forcing the central bank either to ask for fiscal help from the Treasury or to pursue more monetary expansion, with its inflationary implications.…”

Shotgun Wedding: Fiscal and Monetary Policy

“…In a richer model with long-term debt, the left-hand side term represents the real value of the central bank's portfolio of bonds. Bassetto and Messer (2013) remark that, so long as all of the central bank's liabilities are in the form of paper money and the bank pursues a policy of always expanding the money supply, fluctuations in the real value of bonds do not threaten the central bank's ability to deliver H s > 0 every period. But the central bank's ability to do this…”

Public Liquidity Demand and Central Bank Independence

“…In order to prepare the ground for the game of chicken studied in Section 3, this subsection briefly revisits the above analysis of feasible policies in the case in which the public sector is split into fiscal and monetary authorities that have separate budget constraint, as in Bassetto and Messer (2013) or Hall and Reis (2015).…”