Eric Lonergan — Does the central bank’s balance sheet matter?

A growing number of economists are advocating granting central banks the power to make payments to households. Most recently, Mark Blyth, Simon Wren-Lewis and I argue in The Guardian that the Bank of England should be given this power – not with a view to using it now, but as a contingency. Currently, contingency planning amounts to keeping our fingers crossed and hoping there is no negative shock to demand – that is irresponsible. Further QE, negative interest rates, and attempts to raise the inflation target are all terrible policy options – probably ineffective, and potentially self-defeating. Making payments to the household sector, by contrast, is in many ways preferable to conventional monetary policy.

Encouragingly, the predominant objection to this proposal is rarely about efficacy. The main area of concern is the potential impact on the Bank of England’s balance sheet – and, by the implication, on future control of inflation. This subject can be made very complex and confused. But the crux of the matter is straightforward, and the balance sheet issues that arise are not unique to our proposal.

Lonergan goes on to point out the problem is a pseudo-problem in that it arises from accounting conventions and can be addressed by the same. It is the government's bank, and the government makes the rules.

A central bank of a government that floats its currency and doesn't incur financial obligations other than in its currency is not remotely like a private financial institution because the government is the currency issuer. Its liabilities are not like private liabilities other than in the accounting sense.

Many interesting points, many of which have been made by MMT and Post Keynesian economists and financial experts.

Sample of one
Does the central bank’s balance sheet matter?

Eric Lonergan