Central Banks as Fiscal Players Itiswellknownthatthebalancesheetsofmostmajorcentralbanks significantly expanded in the aftermath of the financial crisis of 2007–2011, but the consequences of this expansion are not well understood.Thisbookdevelopsaunifiedframeworktoexplainhow and why central bank balance sheets have expanded and what this shiftmeansforfiscalandmonetarypolicy.Buiteraddressesanumber of key issues in monetary economics and public finance, including howhelicoptermoneyworks,whenmodernmonetarytheorymakes sense,whytheEurosystemhasapotentiallyfataldesignflaw,whythe fiscaltheoryofthepricelevelisafallacyandhowtoescapefromthe zerolowerbound. willem buiter is Visiting Professor of International and Public Affairs at Columbia University. He was an academic economist for twenty-eight years. He was a founding external member of the Monetary Policy Committee of the Bank of England from 1997 to 2000and hasbeen an adviserto theIMF, the WorldBank, theInter- American Development Bank, the European Commission, central banksandfinanceministriesacrosstheworld. federico caffe` lectures This series of annual lectures was initiated to honour the memory of Federico Caffè. They are jointly sponsored by the Department of Public EconomicsattheUniversityofRome,whereCaffèheldachairfrom1959 to 1987, and the Bank of Italy, where he served for many years as an advisor.Thepublicationofthelectureswillprovideavehicleforleading scholarsintheeconomicsprofession,andfortheinterestedgeneralreader, toreflectonthepressingeconomicandsocialissuesofthetimes. OtherBooksinThisSeries NicolaAcocella,RediscoveringEconomicPolicyasaDiscipline(2018) SamuelBowles,TheNewEconomicsofInequalityandRedistribution (2012) JánosKornaiandKarenEggleston,Welfare,ChoiceandSolidarityin Transition:ReformingtheHealthSectorinEasternEurope(2010) PaoloSylosLabini,Underdevelopment:AStrategyforReform(2010) Serge-ChristopheKolm,Reciprocity:AnEconomicsofSocial Relations(2009) AugustoGraziani,TheMonetaryTheoryofProduction(2009) LuigiL.Pasinetti,KeynesandtheCambridgeKeynesians(2009) Jean-JacquesLaffont,RegulationandDevelopment(2005) RobertM.Solow,MonopolisticCompetitionandMacroeconomic Theory(1998) EdmondMalinvaud,DiagnosingUnemployment(1994) Central Banks as Fiscal Players The Drivers of Fiscal and Monetary Policy Space willem buiter ColumbiaUniversity UniversityPrintingHouse,CambridgeCB28BS,UnitedKingdom OneLibertyPlaza,20thFloor,NewYork,NY10006,USA 477WilliamstownRoad,PortMelbourne,VIC3207,Australia 314–321,3rdFloor,Plot3,SplendorForum,JasolaDistrictCentre, NewDelhi–110025,India 79AnsonRoad,#06–04/06,Singapore079906 CambridgeUniversityPressispartoftheUniversityofCambridge. ItfurtherstheUniversity’smissionbydisseminatingknowledgeinthepursuitof education,learning,andresearchatthehighestinternationallevelsofexcellence. www.cambridge.org Informationonthistitle:www.cambridge.org/9781108842822 DOI:10.1017/9781108904292 ©WillemBuiter2021 Thispublicationisincopyright.Subjecttostatutoryexception andtotheprovisionsofrelevantcollectivelicensingagreements, noreproductionofanypartmaytakeplacewithoutthewritten permissionofCambridgeUniversityPress. Firstpublished2021 AcataloguerecordforthispublicationisavailablefromtheBritishLibrary. ISBN978-1-108-84282-2Hardback ISBN978-1-108-82276-3Paperback CambridgeUniversityPresshasnoresponsibilityforthepersistenceoraccuracyof URLsforexternalorthird-partyinternetwebsitesreferredtointhispublication anddoesnotguaranteethatanycontentonsuchwebsitesis,orwillremain, accurateorappropriate. Central Banks as Fiscal Players Itiswellknownthatthebalancesheetsofmostmajorcentralbanks significantly expanded in the aftermath of the financial crisis of 2007–2011, but the consequences of this expansion are not well understood.Thisbookdevelopsaunifiedframeworktoexplainhow and why central bank balance sheets have expanded and what this shiftmeansforfiscalandmonetarypolicy.Buiteraddressesanumber of key issues in monetary economics and public finance, including howhelicoptermoneyworks,whenmodernmonetarytheorymakes sense,whytheEurosystemhasapotentiallyfataldesignflaw,whythe fiscaltheoryofthepricelevelisafallacyandhowtoescapefromthe zerolowerbound. willem buiter is Visiting Professor of International and Public Affairs at Columbia University. He was an academic economist for twenty-eight years. He was a founding external member of the Monetary Policy Committee of the Bank of England from 1997 to 2000and hasbeen an adviserto theIMF, the WorldBank, theInter- American Development Bank, the European Commission, central banksandfinanceministriesacrosstheworld. federico caffe` lectures This series of annual lectures was initiated to honour the memory of Federico Caffè. They are jointly sponsored by the Department of Public EconomicsattheUniversityofRome,whereCaffèheldachairfrom1959 to 1987, and the Bank of Italy, where he served for many years as an advisor.Thepublicationofthelectureswillprovideavehicleforleading scholarsintheeconomicsprofession,andfortheinterestedgeneralreader, toreflectonthepressingeconomicandsocialissuesofthetimes. OtherBooksinThisSeries NicolaAcocella,RediscoveringEconomicPolicyasaDiscipline(2018) SamuelBowles,TheNewEconomicsofInequalityandRedistribution (2012) JánosKornaiandKarenEggleston,Welfare,ChoiceandSolidarityin Transition:ReformingtheHealthSectorinEasternEurope(2010) PaoloSylosLabini,Underdevelopment:AStrategyforReform(2010) Serge-ChristopheKolm,Reciprocity:AnEconomicsofSocial Relations(2009) AugustoGraziani,TheMonetaryTheoryofProduction(2009) LuigiL.Pasinetti,KeynesandtheCambridgeKeynesians(2009) Jean-JacquesLaffont,RegulationandDevelopment(2005) RobertM.Solow,MonopolisticCompetitionandMacroeconomic Theory(1998) EdmondMalinvaud,DiagnosingUnemployment(1994) Central Banks as Fiscal Players The Drivers of Fiscal and Monetary Policy Space willem buiter ColumbiaUniversity UniversityPrintingHouse,CambridgeCB28BS,UnitedKingdom OneLibertyPlaza,20thFloor,NewYork,NY10006,USA 477WilliamstownRoad,PortMelbourne,VIC3207,Australia 314–321,3rdFloor,Plot3,SplendorForum,JasolaDistrictCentre, NewDelhi–110025,India 79AnsonRoad,#06–04/06,Singapore079906 CambridgeUniversityPressispartoftheUniversityofCambridge. ItfurtherstheUniversity’smissionbydisseminatingknowledgeinthepursuitof education,learning,andresearchatthehighestinternationallevelsofexcellence. www.cambridge.org Informationonthistitle:www.cambridge.org/9781108842822 DOI:10.1017/9781108904292 ©WillemBuiter2021 Thispublicationisincopyright.Subjecttostatutoryexception andtotheprovisionsofrelevantcollectivelicensingagreements, noreproductionofanypartmaytakeplacewithoutthewritten permissionofCambridgeUniversityPress. Firstpublished2021 AcataloguerecordforthispublicationisavailablefromtheBritishLibrary. ISBN978-1-108-84282-2Hardback ISBN978-1-108-82276-3Paperback CambridgeUniversityPresshasnoresponsibilityforthepersistenceoraccuracyof URLsforexternalorthird-partyinternetwebsitesreferredtointhispublication anddoesnotguaranteethatanycontentonsuchwebsitesis,orwillremain, accurateorappropriate. Central Banks as Fiscal Players Itiswellknownthatthebalancesheetsofmostmajorcentralbanks significantly expanded in the aftermath of the financial crisis of 2007–2011, but the consequences of this expansion are not well understood.Thisbookdevelopsaunifiedframeworktoexplainhow and why central bank balance sheets have expanded and what this shiftmeansforfiscalandmonetarypolicy.Buiteraddressesanumber of key issues in monetary economics and public finance, including howhelicoptermoneyworks,whenmodernmonetarytheorymakes sense,whytheEurosystemhasapotentiallyfataldesignflaw,whythe fiscaltheoryofthepricelevelisafallacyandhowtoescapefromthe zerolowerbound. willem buiter is Visiting Professor of International and Public Affairs at Columbia University. He was an academic economist for twenty-eight years. He was a founding external member of the Monetary Policy Committee of the Bank of England from 1997 to 2000and hasbeen an adviserto theIMF, the WorldBank, theInter- American Development Bank, the European Commission, central banksandfinanceministriesacrosstheworld.