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A Cardiograph of the Dollar´s Quality: Qualitative Easing and the Federal Reserve Balance Sheet During the Subprime Crisis

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  • Philipp Bagus
  • Markus H. Schiml

Abstract

In this article we argue that the balance sheet of a central bank contains valuable information for the quality of a currency. As an illustration we analyze the balance sheet of the Federal Reserve System (FED) during the subprime crisis between June 2007 and December 2008. Until September 2008 the balance sheet of the FED did not expand strongly. However, the structure of the FED assets varied pronouncedly. Starting in September 2008 the balance sheet expanded dramatically. The calculation of certain balance sheet ratios supports the assessment of an important decrease of the quality of the currency. Our analysis shows that the analysis of central bank balance sheet policies should not rely solely on quantitative issues but rather include qualitative issues.

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Bibliographic Info

Article provided by University of Economics, Prague in its journal Prague Economic Papers.

Volume (Year): 2010 (2010)
Issue (Month): 3 ()
Pages: 195-217

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Handle: RePEc:prg:jnlpep:v:2010:y:2010:i:3:id:372:p:195-217

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Related research

Keywords: subprime crisis; quality of money; qualitative easing; central banks´ balance sheet; balance sheet analysis;

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References

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  1. Buiter, Willem H, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
  2. Philipp Bagus & Markus H. Schiml, 2009. "New Modes Of Monetary Policy: Qualitative Easing By The Fed," Economic Affairs, Wiley Blackwell, vol. 29(2), pages 46-49, 06.
  3. Roland N. McKean, 1949. "Liquidity and a National Balance Sheet," Journal of Political Economy, University of Chicago Press, vol. 57, pages 506.
  4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  5. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  6. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Exchange rates and fundamentals: new evidence from real-time data," Working Paper Series 0365, European Central Bank.
  7. Stephen G. Cecchetti, 2009. "Crisis and Responses: The Federal Reserve in the Early Stages of the Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 51-75, Winter.
  8. MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages F673-91, November.
  9. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 38(04), pages 918-937, December.
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