Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies

54 Pages Posted: 4 Jan 2013

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Luisa Corrado

University of Rome Tor Vergata Department of Economics and Finance

Jack Meaning

University of Kent - Canterbury Campus

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2012

Abstract

The financial crisis and its aftermath have stimulated a vigorous debate on the use of macroprudential instruments both for regulating the banking system and for providing additional tools for monetary policymakers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the zero lower bound. Central banks have thus been put in mind of the effectiveness of extended open market operations as supplementary monetary policy tools. These are essentially fiscal instruments, in that they entail the issuance of central bank liabilities backed by fiscal transfers. Given that these tools are written into fiscal budget constraints, we can examine the consequences of the operations in the context of a microfounded macroeconomic model of banking and money, and we can simulate the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role that reserves for bond and capital swaps play in stabilizing the economy, as well as the impact of changes in the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilize the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity, and hence allow other financial spreads to move less violently over the cycle to compensate.

Full publication: Are Central Bank Balance Sheets in Asia Too Large?

Keywords: non-conventional monetary interest on reserves, monetary and fiscal policy instruments, Basel III

JEL Classification: E31, E40, E51

Suggested Citation

Chadha, Jagjit S. and Corrado, Luisa and Meaning, Jack, Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies (October 1, 2012). BIS Paper No. 66t. Available at SSRN: https://ssrn.com/abstract=2185409

Jagjit S. Chadha (Contact Author)

University of St. Andrews - School of Management ( email )

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St. Andrews, Fife KY16 9SS
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HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages/j.chadha.shtml

Luisa Corrado

University of Rome Tor Vergata Department of Economics and Finance ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Jack Meaning

University of Kent - Canterbury Campus ( email )

Keynes College
Canterbury, Kent CT2 7NP
United Kingdom

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