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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.

Suggested Citation

  • Philipp Bagus & Markus H. Schiml, 2010. "A Cardiograph of the Dollar´s Quality: Qualitative Easing and the Federal Reserve Balance Sheet During the Subprime Crisis," Prague Economic Papers, University of Economics, Prague, vol. 2010(3), pages 195-217.
  • Handle: RePEc:prg:jnlpep:v:2010:y:2010:i:3:id:372:p:195-217
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    References listed on IDEAS

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    1. 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.
    2. Buiter, Willem H., 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
    3. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
    4. 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, June.
    5. Roland N. McKean, 1949. "Liquidity and a National Balance Sheet," Journal of Political Economy, University of Chicago Press, vol. 57, pages 506-506.
    6. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Exchange rates and fundamentals: new evidence from real-time data," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 317-341, March.
    7. MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages 673-691, November.
    8. 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.
    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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    Cited by:

    1. Philipp Bagus, 2011. "The Eurosystem: Costs and Tragedies," Chapters,in: Institutions in Crisis, chapter 7 Edward Elgar Publishing.

    More about this item

    Keywords

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

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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