Is there a limit to increase central bank balance sheets?
is no physical limit to it. A central bank can buy anything, even cars
and cheese, and just pay for it, with a claim on its own balance sheet.
Having said that, there are both theoretical and empirical reasons to
think that there are limits.
What theory sees a limit to central bank balance sheet expansion?
theoretical limit was discussed in a paper called «Some Unpleasant
Monetarist Arithmetic» published by Thomas Sargent and Neil Wallace in
1981. Suppose a central bank is worried about rising inflation and
decides to raise interest rates. But the government has a huge debt with
a short maturity. By raising short term interest rates, the central
bank raises the debt service burden for the government. At some point,
people realise that the government can't support the debt burden without
going back to the central bank to print more money. This is a tipping
point. And then you are in hyperinflation.''