Central bank balance sheets and fiscal operations

This paper reviews how a central bank’s involvement in activities such as foreign exchange intervention and restructuring banking systems at the behest of the government may affect its balance sheet and the possible implications. Section 2 argues that if such operations leave the central bank with low, or even negative, capital its (perceived) independence and ability to conduct monetary policy may be affected. Section 3 sets out some stylised facts about central banks’ balance sheets, and highlights the role of seigniorage in increasing capital and that of the main quasi-fiscal activities in reducing capital.