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The Relevance or Otherwise of the Central Bank's Balance Sheet

In: NBER International Seminar on Macroeconomics 2013

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Listed:
  • David Miles
  • Jochen Schanz

Abstract

This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk]averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect householdsf choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large]scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
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Suggested Citation

  • David Miles & Jochen Schanz, 2013. "The Relevance or Otherwise of the Central Bank's Balance Sheet," NBER Chapters,in: NBER International Seminar on Macroeconomics 2013, pages 103-116 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13156
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    References listed on IDEAS

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    1. Vayanos, Dimitri & Vila, Jean-Luc, 2009. "A preferred-habitat model of the term structure of interest rates," LSE Research Online Documents on Economics 29308, London School of Economics and Political Science, LSE Library.
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    6. Sargent, Thomas J & Smith, Bruce D, 1987. "Irrelevance of Open Market Operations in Some Economies with Government Currency Being Dominated in Rate of Return," American Economic Review, American Economic Association, vol. 77(1), pages 78-92, March.
    7. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59.
    8. A Durré & H Pill, 2012. "Central Bank balance sheets as policy tools," BIS Papers chapters,in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 193-213 Bank for International Settlements.
    9. Christophe Chamley & Herakles Polemarchakis, 1984. "Assets, General Equilibrium and the Neutrality of Money," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 129-138.
    10. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
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    12. Philippe Weil, 2008. "Overlapping Generations: the First Jubilee," Post-Print hal-01022015, HAL.
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    Citations

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    Cited by:

    1. christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," BIS Working Papers 559, Bank for International Settlements.
    2. Haldane, Andrew & Roberts-Sklar, Matt & Wieladek, Tomasz & Young, Chris, 2016. "QE: the story so far," CEPR Discussion Papers 11691, C.E.P.R. Discussion Papers.
    3. repec:eee:jbfina:v:83:y:2017:i:c:p:232-248 is not listed on IDEAS
    4. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    5. W. Arrata & B. Nguyen, 2017. "Price impact of bond supply shocks: Evidence from the Eurosystem's asset purchase program," Working papers 623, Banque de France.
    6. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69, June.
    7. Manfred Kremer, 2016. "Macroeconomic effects of financial stress and the role of monetary policy: a VAR analysis for the euro area," International Economics and Economic Policy, Springer, vol. 13(1), pages 105-138, January.
    8. Christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," DNB Working Papers 510, Netherlands Central Bank, Research Department.
    9. Miles, David & Schanz, Jochen, 2014. "Should central banks provide reserves via repos or outright bond purchases?," CEPR Discussion Papers 10229, C.E.P.R. Discussion Papers.
    10. Jack Meaning & James Warren, 2015. "The Transmission of Unconventional Monetary Policy in UK Government Debt Markets," National Institute Economic Review, National Institute of Economic and Social Research, vol. 234(1), pages 40-47, November.

    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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