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The Federal Reserve System Balance Sheet; What Happened and Why it Matters

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  • Peter Stella

Abstract

The recent expansion of the balance sheet of the consolidated Federal Reserve Banks (FRB) is analyzed in an historical context. The analysis reveals that the nature of Fed involvement in U.S. financial markets has changed dramatically and its expansion is several orders of magnitude beyond what is usually reported. The associated fiscal risks and potential exit strategies are then considered. Although risks are considerable in certain unlikely scenarios, FRB capital, earnings capacity, and reserves are more than ample to preserve their financial independence. Nevertheless, the occurrence of losses or a significant drop in FRB profit might lead to an eventual curtailment of Fed operational independence. The paper concludes by considering options to enhance FRB risk management and to assign responsibilities for monetary, financial stability and fiscal policies once the current crisis is overcome.

Suggested Citation

  • Peter Stella, 2009. "The Federal Reserve System Balance Sheet; What Happened and Why it Matters," IMF Working Papers 09/120, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/120
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    References listed on IDEAS

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    1. Cukierman, Alex, 2008. "Central bank independence and monetary policymaking institutions -- Past, present and future," European Journal of Political Economy, Elsevier, vol. 24(4), pages 722-736, December.
    2. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    3. Rebecca McCaughrin & Simon T Gray & Alexandre Chailloux, 2008. "Central Bank Collateral Frameworks; Principles and Policies," IMF Working Papers 08/222, International Monetary Fund.
    4. Peter Stella & Seiichi Shimizu & Simon T Gray & Ulrich H Klueh & Alexandre Chailloux, 2008. "Central Bank Response to the 2007–08 Financial Market Turbulence; Experiences and Lessons Drawn," IMF Working Papers 08/210, International Monetary Fund.
    5. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
    6. Charles Enoch, 1997. "Transparency and Ambiguity in Central Bank Safety Net Operations," IMF Working Papers 97/138, International Monetary Fund.
    7. Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army With Only a Signal Corps," NBER Working Papers 7420, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Donato Masciandaro, 2016. "More than the Human Appendix: Fed Capital and Central Bank Financial Independence," BAFFI CAREFIN Working Papers 1635, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region : What Way Forward?," Finance Working Papers 23011, East Asian Bureau of Economic Research.
    3. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, pages 1-19.
    4. Bholat, David & Darbyshire, Robin, 2016. "Accounting in central banks," Bank of England working papers 604, Bank of England.
    5. Stephen Quinn & William Roberds, 2016. "Death of a Reserve Currency," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 63-103, December.
    6. Kotaro Ishi & Kenji Fujita & Mark R. Stone, 2011. "Should Unconventional Balance Sheet Policies Be Added to the Central Bank toolkit? a Review of the Experience so Far," IMF Working Papers 11/145, International Monetary Fund.
    7. repec:sgm:jbfeuw:v:2:y:2015:i:4:p:14 is not listed on IDEAS
    8. Pikkarainen, Pentti, 2010. "Central bank liquidity during the financial market and economic crisis : observations, thoughts and questions," Research Discussion Papers 20/2010, Bank of Finland.
    9. William A. Allen, 2015. "Asset choice in British central banking history, the myth of the safe asset, and bank regulation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 18-31, June.
    10. George Selgin, 2014. "Operation Twist-the-Truth: How the Federal Reserve Misrepresents Its History and Performance," Cato Journal, Cato Journal, Cato Institute, vol. 34(2), pages 229-263, Spring/Su.
    11. Schüder, Stefan, 2014. "Expansive monetary policy in a portfolio model with endogenous asset supply," Economic Modelling, Elsevier, vol. 41(C), pages 239-252.
    12. Pohl Rüdiger, 2009. "Krisenbewältigung und Krisenvermeidung: Lehren aus der Finanzkrise / Crisis resolution and future crisis prevention: lessons from the recent financial crisis," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 60(1), pages 289-316, January.

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