2017-02-12www.fuw.ch

Is there a limit to increase central bank balance sheets?

There is no physical limit to it. A central bank can buy anything, even cars and cheese, and just pay for it, with a claim on its own balance sheet. Having said that, there are both theoretical and empirical reasons to think that there are limits.

What theory sees a limit to central bank balance sheet expansion?

The theoretical limit was discussed in a paper called «Some Unpleasant Monetarist Arithmetic» published by Thomas Sargent and Neil Wallace in 1981. Suppose a central bank is worried about rising inflation and decides to raise interest rates. But the government has a huge debt with a short maturity. By raising short term interest rates, the central bank raises the debt service burden for the government. At some point, people realise that the government can't support the debt burden without going back to the central bank to print more money. This is a tipping point. And then you are in hyperinflation.''



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