Munich Personal RePEc Archive

Fiscal Considerations of Central Bank Recapitalization

Bagus, Philipp and Howden, David (2014): Fiscal Considerations of Central Bank Recapitalization. Published in: Journal of Prices & Markets , Vol. 2, No. 2 (2014): pp. 36-47.

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Monetary authorities enacted novel policies to exit the economic crisis of 2008. Fiscal backing of the monetary authority was important as central banks faced the growing threat of insolvency as unorthodox policies or political events, e.g., a potential Eurozone break up, allowed for central bank balance sheet losses. The fiscal authority has three options to support or recapitalize a central bank, with three resultant secondary effects. First, seigniorage can be foregone as notes and coins are given free of charge to the central bank for distribution (instead of the normal practice of selling them at cost). Second, the Treasury can halt profit remittances from the central bank to its own coffers. Finally, the Treasury can make a direct capital infusion to the central bank in the form of government bonds. We assess these options, and look at secondary effects on government borrowing rates and fiscal resources that result from a recapitalization of a central bank.

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