Peter Stella

Central Bank Archaeology Website

During the 1990s and 2000s, the quantity theory of money (QTM) fell out of favor both among policymakers and academics. Central bankers almost universally adopted short-term interest rates as their policy instruments while money was often dropped entirely from the dominant theoretical macro models. The central bank response to the global financial...

In this paper, we discuss the modern history of monetarism and its alternatives, as well as the changing empirical relationship of various measures of money and inflation. After demonstrating that previous naïve correlations between money and inflation as established in the 20th century literature have largely disappeared, we explain why this canno...

Central banks often hold far more assets, and issue more liabilities to finance those assets, than is necessary to provide their domestic payments systems with adequate liquidity. That is to say, their balance sheets are “large” (See Stella (2010) Minimising monetary policy (BIS Working Paper 330)). Frequently central banks are large owing to their...

Textbook central banks need not be concerned with the financial strength of their balance sheets but those engaged in quasifiscal operations face additional challenges to attain their mandated objectives. Quasifiscal operations leading to significant operational deficits risk the loss of central bank balance sheet control and consequently over poli...

Centrals bank have a virtually unlimited capacity to create money but that does not mean it is desirable to do so. What is needed now are tough legislative spending decisions about supporting populations impacted by COVID 19. Who? What? When? How? Modern debt management agencies have the capacity to finance increased government financing needs with...

A 1/2 page law that would assist the Fed to manage its balance sheet, provide HQLA to the global financial system, and eliminate the necessity for the global financial system to intermediate $ 1.5 - $ 2 trillion in lending to the Federal Reserve banks.

Illustrating the creation and destruction of commercial bank "money" with reference to modern payments systems.

The expansion of central bank balance sheets since the Great Recession has had a significant unintended consequence—an extraordinary increase in bank reserves worldwide. The issue with large excess bank reserves is not that they may eventually become fuel for an inflationary fire—for they have no such potential. The problem is precisely the opposit...

Between 1980 and before the recent crisis, the ratio of financial market debt to liquid assets rose exponentially in the U.S. (and in other financial markets), reflecting in part the greater use of securitized assets to collateralize borrowing. The subsequent crisis has reduced the pool of assets considered acceptable as collateral, resulting in a...

Introduction Changes in Fed Operations and Asset Holdings Federal Reserve Balance Sheet Risk Separating Institutional Responsibilities for Monetary and Financial Stability Policies Notes About the Author

The response of leading central banks to the current financial crisis has raised the magnitude of the financial and governance risks they face. An evaluation of the financial strength of a number of those banks suggests that they are in little danger of being forced by financial losses to alter their policies. Governance risks cannot be dismissed s...

A long debate about the appropriate reform of the Governing Council (GC), the European Central Bank (ECB)’s decision-making body, took place earlier this decade in the context of the imminent enlargement of the European Union (EU) and the Eurozone. Since its creation, the ECB GC has been composed of six Executive Board (EB) members and all of the E...

The recent expansion of the balance sheet of the consolidated Federal Reserve Banks (FRB) is analyzed in an historical context. The analysis reveals that the nature of Fed involvement in U.S. financial markets has changed dramatically and its expansion is several orders of magnitude beyond what is usually reported. The associated fiscal risks and p...

The paper reviews the policy response of major central banks during the 2007-08 financial market turbulence and suggests that there is scope for convergence among central bank operational frameworks through the adoption of those elements that proved most instrumental in calming markets. These include (i) rapid liquidity provision to a broad range o...

The financial health of central banks and its relation to policy outcomes has recently been recognized as an important policy issue. While case study evidence clearly indicates that weak central bank finances can hamper effective policy implementation, the question of whether central bank financial strength influences policy performance remains con...

Central bank financial strength is positively associated with good policy performance. Financially weak central banks generate losses which undermine macroeconomic stability and call into question the credibility of their policies. In assessing central bank financial strength a careful examination of the policy regime and the volatility of the econ...

Conventional economic policy models focus only on selected elements of the central bank balance sheet, in particular monetary liabilities and sometimes foreign reserves. The canonical model of an "independent" central bank assumes that it chooses money (or an interest rate), unconstrained by a need to generate seignorage for itself or government. W...

Although rarely acknowledged explicitly, the financial strength of an independent and credible central bank must be commensurate with its policy tasks and the risks it faces. This paper explores the relationship between central bank financial strength and policy outcomes, stressing the importance of financial independence as a fundamental support t...

A central bank is financially strong if it possesses resources sufficient to attain its fundamental policy objective(s). Once endowed with those resources, relations between government and central bank should be designed so that significant changes in central bank financial strength do not occur unless necessitated by changes in policy objectives....

To mitigate the risks of contagion from problems arising in the banking sector, many countries operate some form of banking sector safety net. Such safety nets generally involve a judicious mixture of transparency and ambiguity. This ambiguity may be important to counter moral hazard effects but may lead to excessive forbearance in the face of bank...

Central banks may operate perfectly well without capital as conventionally defined. A large negative net worth, however, is likely to compromise central bank independence and interfere with its ability to attain policy objectives. If society values an independent central bank capable of effectively implementing monetary policy, recapitalization may...

Systemic tax administration problems in many developing countries have led to a search for radical solutions. One such proposed solution is tax farming. Tax farming is a system wherein the right to collect taxes is auctioned off to the highest bidder. An analysis of the historical experience with tax farming shows that its purported administrative...

In many countries, the activities of public enterprises have an important fiscal impact. While the precise nature of this impact is often obscured, it is important that it be reflected in measures of overall fiscal activity. The paper is intended to raise and clarify some of the issues involved in this task.

Tax amnesties have frequently been justified as politically popular ways to generate increases in government revenue. This paper examines the circumstances under which amnesties are likely to have a beneficial impact on revenue collections. It concludes that, while in general it may be correct to impose a reduced penalty on individuals who voluntar...

If central banks generate profits and turn the residual, after addition to reserves, to the treasury, marginal changes in bank profitability directly affect the central government`s fiscal deficit. However, if central banks generate losses that are not funded by the treasury, marginal changes will not affect the fiscal deficit. In addition, quasi-f...

Abstract Disclaimer:The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. Conventional economic models focus only on selectedelements of the central bank balance sheet, in particular monetary,liabilities and sometimes,foreign reserves. The usual model of an “independent”...