How much liquidity can a central bank (e.g. Fed or ECB) inject before it runs out of money?
I have a couple of questions:
(1) Is there an upper limit to how much liquidity a central bank can inject into the economy?
(2) Can they do this under their reserves are exhausted or can it go on indefinitely?
(3) Is it ever considered Seigniorage to do this?
(4) How does it affect their balance sheet?
If you have answers to one or more of the questions, please respond. Thanks.
In the US, the fed is limited becuase it is prohibited by law from flat out printing money. To add to the money supply, it buys treasury securities in the open market. So, the amount of liquidity that it can inject is limited to the supply of treasury securities times the money multiplier effect.
In the absence of this legal constraint it could add to the money supply indefinately.
Whether seigniorage exists depends on how cynical you are. The Fed funds itself almost exclusively with interest that it earns on its holdings of treasury securities. The interest earned in excess of what is necessary to fund its operations is rebated back to the Treasury.
When it adds liquidity to the money supply, it adds treasury securities to the asset side of its balance sheet and currency notes to the liability side.
Van Batenburg, Blitz, Cohan on Central Bank Policy
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