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Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies

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Author Info

  • Jagjit S. Chadha

    ()
    (School of Economics, Keynes College, University of Kent)

  • Luisa Corrado

    ()
    (Faculty of Economics, University of Rome "Tor Vergata")

  • Jack Meaning

    ()
    (School of Economics, Keynes College, University of Kent)

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 o¤setting 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 ?scal 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 financial spreads to move less violently over the cycle to compensate.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 230.

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Length: 44 pages
Date of creation: 18 Apr 2012
Date of revision: 18 Apr 2012
Handle: RePEc:rtv:ceisrp:230

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Related research

Keywords: Non-conventional Monetary Interest on Reserves; Monetary and Fiscal Policy Instruments; Basel III;

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References

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  1. 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.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. 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.
  4. Scott Freeman & Joseph H. Haslag, 1996. "On the optimality of interest-bearing reserves in economies of overlapping generations (*)," Economic Theory, Springer, vol. 7(3), pages 557-565.
  5. 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.
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Citations

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Cited by:
  1. Falagiarda, Matteo, 2013. "Evaluating Quantitative Easing: A DSGE Approach," MPRA Paper 49457, University Library of Munich, Germany.
  2. Jagjit S. Chadha & Luisa Corrado & Sean Holly, 2013. "A Note on Money and the Conduct of Monetary Policy," Cambridge Working Papers in Economics 1329, Faculty of Economics, University of Cambridge.
  3. 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.
  4. Bank for International Settlements, 2012. "Are central bank balance sheets in Asia too large?," BIS Papers, Bank for International Settlements, number 66, May.
  5. 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.
  6. 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.
  7. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.

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