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 pre-crisis levels has little effect on the likelihood of net losses.
Published in _International Journal of Central Banking_
(Vol. 15, Iss. 5, December 2019, pp. 255-306).
Related: _Liberty Street Economics_ article, January 9, 2018: http://libertystreeteconomics.newyorkfed.org/2018/01/fiscal-implications-of-the-federal-reserves-balance-sheet-normalization.html