| This paper gives a detailed explanation of why a central bank without fiscal
backing can lose control of inflation. Moreover, it argues that such danger emerged only
recently for the ECB due to its increasing quasi-fiscal activities. Finally we argue that it might
not generally be a good idea to provide fiscal backing for the ECB. That said, the backing
of the central bank’s equity capital by fiscal policy (“fiscal backing”) appears to be a viable
strategy if and when the central bank’s accounting losses are not related to the state of public
finances. If, however, central bank portfolio losses are a direct outcome of deteriorating
public finances, preserving the central bank’s equity capital may lead to a policy of high
inflation, possibly above the ECB’s target level. |
Abstract
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