Staff Reports
Fiscal Implications of the Federal Reserve's Balance Sheet Normalization
Number 833
January 2018

JEL classification: E58, E59, E69

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

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 precrisis levels has little effect on the likelihood of net losses.

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AUTHOR DISCLOSURE STATEMENT(S)
Michele Cavallo
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Board of Governors of the Federal Reserve System.

Marco Del Negro
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author is an employee of the Federal Reserve Bank of New York.

W. Scott Frame
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Jamie Grasing
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Benjamin A. Malin
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Carlo Rosa
The author declares that he has no relevant or material financial interests that relate to the research described in this paper, other than the fact that the author was an employee of the Federal Reserve Bank of New York at the time this research was conducted. The author is currently working for a financial institution.