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Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets

Author

Listed:
  • Viral V. Acharya
  • Rahul S. Chauhan
  • Raghuram Rajan
  • Sascha Steffen

Abstract

When the Federal Reserve (Fed) expands its balance sheet via quantitative easing, commercial banks finance their reserve holdings with demandable deposits, especially uninsured ones, and also issue lines of credit to corporations. These bank-issued claims on liquidity did not shrink when the Fed halted and eventually reversed its balance-sheet expansion in 2014-2019. Consequently, the financial sector, especially banks that increased their liquidity risk exposure more, became vulnerable to shocks. This in turn has necessitated further liquidity provision by the Fed, as witnessed in September 2019, March 2020, and March 2023, suggesting potential tradeoffs between unconventional monetary policy and financial stability.

Suggested Citation

  • Viral V. Acharya & Rahul S. Chauhan & Raghuram Rajan & Sascha Steffen, 2023. "Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets," NBER Working Papers 31050, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31050
    Note: CF EFG LE ME PE POL
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    Cited by:

    1. Chavleishvili, Sulkhan & Kremer, Manfred & Lund-Thomsen, Frederik, 2024. "Quantifying financial stability risks for monetary policy," Research Bulletin, European Central Bank, vol. 115.
    2. Chavleishvili, Sulkhan & Kremer, Manfred & Lund-Thomsen, Frederik, 2023. "Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach," Working Paper Series 2833, European Central Bank.
    3. Fricke, Daniel & Greppmair, Stefan & Paludkiewicz, Karol, 2024. "Excess reserves and monetary policy tightening," Discussion Papers 05/2024, Deutsche Bundesbank.
    4. Bryan Hardy & Sonya Zhu, 2023. "Unpacking international banks' deposit funding," BIS Quarterly Review, Bank for International Settlements, September.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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