Working paper on the fiscal consequences of central bank decisions

In his working paper Athanasios Orphanides examines some of the decisions taken by the Federal Reserve and the European Central Bank (ECB) during the crisis raising the question whether it is appropriate for an independent central bank in a democratic society to use its discretionary authority to decide which stakeholders of which private entity to wipe out and which to support.

Fiscal implications of central bank policies tended to be seen as relatively minor and usually escaped close scrutiny. However, in the aftermath of the global financial crisis, central banks engaged in unconventional monetary policy as well as in preferential lending operations. At the zero lower bound, monetary and fiscal policies become much closer linked than during periods when interest rates are clearly above zero.

IMFS Research Fellow Orphanides warns that provision of credit by a central bank to some private or government-related entities may sustain entities that would have collapsed otherwise. He analyzes some of the measures of the Fed and the ECB, asking whether it is the proper function of an independent central bank in an democratic society to use its discretion and decide which sectors of the economy deserve the support of the balance sheet and which don’t.

IMFS Working Paper No. 105
Athanasios Orphanides
"Fiscal Implications of Central Bank Balance Sheet Policies"

(PDF, 315 KB)