Merge government, RBI budgets for better fiscal outcomes

An American economist has called for consolidating the central bank and government’s budgets and balance sheets saying such a move can prevent sovereign default risks and ensure better fiscal and monetary outcomes.

According to Citigroup global chief economist Willem H Buiter, the size and the composition of a central bank’s balance sheet have serious fiscal implications.

“Because national treasury is the beneficial owner of the central bank, it makes sense to consolidate the single period (instantaneous) budget identities, balance sheets and intertemporal budget constraint (IBC) of the state and of the central bank and work with a consolidated single period budget identity, balance sheet and IBC of the state,” he said.

Buiter, the Dutch born American-British economist, was speaking at the 16th C D Deshmukh (RBI’s first Indian Governor) memorial lecture on April 11 where media was not allowed.

As per RBI’s website, Buiter said at the lecture that the monetary policy of any central bank has an unavoidable fiscal dimension because the fiscal theory of seigniorage is the right way of thinking about the inherent fiscal dimension of monetary policy.

Seigniorage is the profit that a government makes by issuing currency, especially the difference between the face value of coins and their production costs.

Buiter …read more