Monetary-Fiscal Framework Grounded in Ricardo Reis & IMF policy balance-sheet dynamics

Central Bank Solvency & Sovereign Debt Transmission Lab

When central banks hike rates to tame inflation, their payments on commercial bank reserves surge past the yields on their fixed-coupon bond assets. Quantify the resulting central bank capital losses, remittance blackouts, and sovereign debt-to-GDP spillover paths under different fiscal regimes.

Central Bank Balance Sheet % of GDP

Central Bank Assets ($A/Y$) 28%

Securities portfolio size relative to national output.

CB Asset Portfolio Yield ($r_b$) 1.8%

Average historical coupon locked in during QE.

Remunerated Reserves ($R/Y$) 22%

Interest-bearing liabilities (commercial bank deposits at CB).

Peak Policy Rate ($i_{policy}$) 5.25%

Interest on reserve balances (IORB) paid to commercial banks.

Sovereign & Macro Environment Annual rates

Initial Sovereign Debt-to-GDP ($d_0$) 98%

Total gross general government debt as % of GDP.

Real GDP Growth ($g$) 1.5%

Long-term potential annual real output growth.

Inflation Target / Path ($\pi$) 3.0%

GDP deflator / nominal growth compounding factor.

Primary Fiscal Balance ($s$) -2.5%

Government revenue minus non-interest spending (% GDP).

Treasury Remittance & Loss Rule

Institutional arrangement governing central bank capital shortfalls.

CB Net Margin ($t=1$)

-0.65%

% GDP Operating Loss

Treasury Remittance Loss

-0.65%

Fiscal seigniorage gap

10-Yr Debt Horizon ($d_{10}$)

114.2%

+16.2 pp change

Effective $r - g$ Differential

+0.85%

Debt Snowball Active

Fiscal Strain

Central bank operating losses lead to prolonged remittance suspension. Compounding real interest costs ($r > g$) alongside primary deficits place the sovereign debt trajectory on a non-stabilizing path over the 10-year horizon.

Trajectory Projection (10-Year Horizon)

● Sovereign Debt-to-GDP (%) --- Baseline Stabilizing Threshold Hover or tap points to inspect annual micro-state

View Full 10-Year Annual Accounting Matrix

Year	Policy Rate	CB Assets	CB Net Income	Remittance	CB Equity / Def.	Govt Debt / GDP

Model synced with Ricardo Reis accounting equilibrium.

Core Framework & Ricardo Reis Preoccupations

The Remunerated Reserve Trap

Under pre-2008 central banking, liabilities were zero-interest banknotes. Under modern large balance sheets, central banks fund long-duration assets ($A$) with floating-rate overnight bank reserves ($R$). When the policy rate $i > r_b$, net interest income turns sharply negative:

Π_CB = r_b · A - i_policy · R

The Treasury Remittance Cliff

Treasuries grew accustomed to annual windfall remittances (0.5%–1.5% of GDP) during QE. When CB net income goes negative, remittances halt immediately. Under a Deferred Asset regime, remittances remain zero until future cumulative seigniorage offsets all accumulated losses, widening sovereign borrowing requirements.

Sovereign $r - g$ Dynamics

The sovereign budget evolution is governed by:

Δd_t = (r_t - g_t) · d_{t-1} - s_t - Remit_t

When loss of central bank dividends coincides with high interest costs ($r > g$) and stubborn primary deficits ($s < 0$), sovereign debt experiences self-reinforcing upward momentum.