NBER Working Paper – Fiscal Consequences of Central Bank Losses

Stephen G. Cecchetti & Jens Hilscher

May 2024


In response to the Global Financial Crisis, central banks engaged in large-scale asset purchases funded by the issuance of reserves. These “unconventional” policies continued during the pandemic, so that by 2022 central banks’ balance sheets had grown up to ten-fold. As a result of rapidly increasing interest rates, these massive portfolios began producing substantial losses. We interpret these losses as fiscal policy consequences of quantitative easing and stress that they must be balanced against the prior benefits of implementing purchase policies. Importantly, losses differ qualitatively depending on whether the central bank chooses to buy domestic or foreign assets, thus resulting in transfers either within or between countries. Effects of losses may differ due to accounting rules (when losses are realized) and when the fiscal authority compensates for losses (the structure of indemnification agreements). Data from the Federal Reserve, the Eurosystem, and the Bank of England show that maximum annual losses are between 0.3 and 1.5 percent of GDP. By contrast, the Swiss National Bank is sustaining losses up to 17 percent of GDP.

NBER Working Paper No 32478 – Fiscal Consequences of Central Bank Losses