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The Power of Central Bank Balance Sheets

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  • Athanasios Orphanides

    (Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management (E-mail: athanasios.orphanides@mit.edu))

Abstract

When interest rate policy is hampered by the Zero Lower Bound (ZLB), quantitative easing and other balance sheet policies become essential tools for responding to a crisis or deflationary shock. By unleashing the power of their balance sheets at the onset of the pandemic, without the hesitation observed in past encounters with the ZLB, the Federal Reserve, the European Central Bank and the Bank of Japan provided monetary easing that cushioned the economic blow, served as a backstop to government securities and private assets that prevented a financial market meltdown and facilitated the financing of an essential fiscal expansion. This paper examines how this policy success materialized, drawing on lessons learned from previous encounters with the ZLB, and discusses policy challenges after the pandemic.

Suggested Citation

  • Athanasios Orphanides, 2021. "The Power of Central Bank Balance Sheets," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 39, pages 35-54, November.
    • Handle: RePEc:ime:imemes:v:39:y:2021:p:35-54
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    Cited by:

    1. Martin T. Bohl & Dimitrios Kanelis & Pierre L. Siklos, 2022. "How Central Bank Mandates Influence Content and Tone of Communication Over Time," CQE Working Papers 9622, Center for Quantitative Economics (CQE), University of Muenster.
    2. Athanasios Orphanides, 2023. "The Forward Guidance Trap," IMES Discussion Paper Series 23-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Daniel DĂIANU & Alexie ALUPOAIEI & Matei KUBINSCHI, 2022. "Revisiting Limits and Pitfalls of QE in the Emerging Markets," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-25, April.
    4. Bohl, Martin T. & Kanelis, Dimitrios & Siklos, Pierre L., 2023. "Central bank mandates: How differences can influence the content and tone of central bank communication," Journal of International Money and Finance, Elsevier, vol. 130(C).
    5. Takuji Fueki & Ken Matsushita & Ichiro Muto & Fumitaka Nakamura & Shunichi Yoneyama, 2021. "Adapting to the New Normal: Perspectives and Policy Challenges after the COVID-19 Pandemic Summary of the 2021 BOJ-IMES Conference," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 39, pages 1-18, November.

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    More about this item

    Keywords

    Zero lower bound; Balance sheet policies; Quantitative easing; Eligibility; Fiscal-monetary interactions;
    All these keywords.

    JEL classification:

    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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