2 - A Stylized Set of Accounts for the Treasury, the Central Bank and the State

Summary

Chapter 2 derives the comprehensive balances sheet (or intertemporal budget constraint of the central bank and the Treasury (or general government) and of the consolidated State and contrasts these with the conventional balance sheets. We then consider, theoretically and quantitatively, the arithmetic of fiscal sustainability by focusing on the net non-monetary debt of the consolidated general government and central bank and the seigniorage-augmented primary surplus of the State. The fact that Japan’s general government gross debt was 237.6 percent of GDP at the end of 2017 while the net nonmonetary debt of the consolidated State was only 67.4 percent of GDP underlines the importance of our approach. Japan does not yet have a serious debt stock problem. It has a bit of a flow deficit problem: its general government cyclically adjusted primary budget deficit was 3.8 percent of GDP in 2017. But because it is at the ELB and has been for years, it can extract massive seigniorage – more than 10 percent of GDP each year in the five years leading up to 2017. That suggests that, if Japan ever were to escape the ELB, it could have both a stock and a flow monetary overhang problem.