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Reserves, liquidity and money: an assessment of balance sheet policies

In: Are central bank balance sheets in Asia too large?

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  • Jagjit S Chadha
  • Luisa Corrado
  • Jack Meaning

Abstract

The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate.

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This chapter was published in:

  • Bank for International Settlements, 2012. "Are central bank balance sheets in Asia too large?," BIS Papers, Bank for International Settlements, number 66, 8.
    This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 66-20.

    Handle: RePEc:bis:bisbpc:66-20

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Scott Freeman & Joseph H. Haslag, 1993. "On the optimality of interest-bearing reserves in economies of overlapping generations," Research Paper 9328, Federal Reserve Bank of Dallas.
    2. Vasco Cúrdia & Michael Woodford, 2010. "The central-bank balance sheet as an instrument of monetary policy," Staff Reports 463, Federal Reserve Bank of New York.
    3. Jagjit S. Chadha & Luisa Corrado, 2011. "Macro-prudential Policy on Liquidity: What does a DSGE Model tell us?," Studies in Economics 1108, Department of Economics, University of Kent.
    4. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
    5. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
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    Cited by:
    1. Alec Chrystal, 2012. "Debt and monetary policy: comments on Jagjit S Chadha, Luisa Corrado and Jack Meaning's paper "Reserves, liquidity and money: an assessment of balance sheet policies", and further thoughts," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 352-369 Bank for International Settlements.
    2. Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2013. "A Note on Money and the Conduct of Monetary Policy," Studies in Economics 1306, Department of Economics, University of Kent.
    3. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.
    4. Andrew Filardo & James Yetman, 2012. "The expansion of central bank balance sheets in emerging Asia: what are the risks?," BIS Quarterly Review, Bank for International Settlements, June.
    5. Falagiarda, Matteo, 2013. "Evaluating Quantitative Easing: A DSGE Approach," MPRA Paper 49457, University Library of Munich, Germany.
    6. Bank for International Settlements, 2012. "Are central bank balance sheets in Asia too large?," BIS Papers, Bank for International Settlements, number 66, 8.
    7. Andrew Filardo & James Yetman, 2012. "Key facts on central bank balance sheets in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 10-29 Bank for International Settlements.

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