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The Safety Net: Central Bank Balance Sheets and Financial Crises

Author

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  • Ferguson, Niall
  • Kornejew, Martin
  • Schmelzing, Paul
  • Schularick, Moritz
  • Schularick, Moritz

Abstract

Across history, central banks have used their balance sheets as lenders of last resort (LLR) to stabilize the financial system during crises. We study the evolution and fluctuation of central bank balance sheets since the 1600s and assess the aggregate effects of liquidity interventions. Using plausibly exogenous variation in the likelihood of crisis interventions induced by ex ante beliefs of central bank governors allows us to show that LLR interventions systematically mitigate financial crises and accelerate macroeconomic recoveries. However, we also present evidence that such interventions raise risks of future boom-bust cycles in the financial system.

Suggested Citation

  • Ferguson, Niall & Kornejew, Martin & Schmelzing, Paul & Schularick, Moritz & Schularick, Moritz, 2023. "The Safety Net: Central Bank Balance Sheets and Financial Crises," CEPR Discussion Papers 17858, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:17858
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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