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15 posts on "Central Bank"

September 27, 2017

Why Pay Interest on Excess Reserve Balances?



LSE_2017_Why Pay Interest on Excess Reserve Balances?

In a previous post, we described some reasons why it is beneficial to pay interest on required reserve balances. Here we turn to arguments in favor of paying interest on excess reserve balances. Former Federal Reserve Chairman Ben Bernanke and former Vice Chairman Donald Kohn recently discussed many potential benefits of paying interest on excess reserve balances and some common misunderstandings, including that paying interest on reserves restricts bank lending and provides a subsidy to banks. In this post, we focus primarily on benefits related to the efficiency of the payment system and the reduction in the need for the provision of credit by the Fed when operating in a framework of abundant reserves.

Continue reading "Why Pay Interest on Excess Reserve Balances?" »

Posted by Blog Author at 7:00 AM in Central Bank, Federal Reserve, Monetary Policy | Permalink | Comments (1)

August 16, 2017

Counterparty and Collateral Policies of Central Bank Lending Facilities



Editor’s note: When this post was first published there was an omission in text; text has been restored. (August 16, 2017, 9:05 a.m.)

LSE_Counterparty and Collateral Policies of Central Bank Lending Facilities

In a previous post, we compared the Federal Reserve’s discount window with the standing lending facilities (SLFs) at the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We showed that the Fed’s discount window was less integrated with monetary policy than the SLFs of the other central banks. In this post, we observe that the counterparty and collateral policies of the Fed’s discount window are similarly less integrated with the practices involved in monetary policy operations, in comparison with the other central banks.

Continue reading "Counterparty and Collateral Policies of Central Bank Lending Facilities" »

Posted by Blog Author at 7:00 AM in Central Bank, Monetary Policy | Permalink | Comments (0)

August 04, 2017

A Closer Look at the Fed’s Balance Sheet Accounting



LSE_2017_A Closer Look at the Fed’s Balance Sheet Accountingt


An earlier post on how the Fed changes the size of its balance sheet prompted several questions from readers about the Federal Reserve’s accounting of asset purchases and the payment of principal by the Treasury on Treasury securities owned by the Fed. In this post, we provide a more detailed explanation of the accounting rules that govern these transactions.

Continue reading "A Closer Look at the Fed’s Balance Sheet Accounting" »

July 11, 2017

How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities



LSE_2017_How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities

In our previous post, we considered balance sheet mechanics related to the Federal Reserve’s purchase and redemption of Treasury securities. These mechanics are fairly straightforward and help to illustrate the basic relationships among actors in the financial system. Here, we turn to transactions involving agency mortgage-backed securities (MBS), which are somewhat more complicated. We focus particularly on what happens when households pay down their mortgages, either through regular monthly amortizations or a large payment covering some or all of the outstanding balance, as might occur with a refinancing.

Continue reading "How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities" »

Posted by Blog Author at 7:00 AM in Central Bank, Federal Reserve, Monetary Policy | Permalink | Comments (1)

July 10, 2017

How the Fed Changes the Size of Its Balance Sheet



LSE_2017_How the Fed Changes the Size of Its Balance Sheet

The size of the Federal Reserve’s balance sheet increased greatly between 2009 and 2014 owing to large-scale asset purchases. The balance sheet has stayed at a high level since then through the ongoing reinvestment of principal repayments on securities that the Fed holds. When the Federal Open Market Committee (FOMC) decides to reduce the size of the Fed’s balance sheet, it is expected to do so by gradually reducing the pace of reinvestments, as outlined in the June 2017 addendum to the FOMC’s Policy Normalization Principles and Plans. How do asset purchases increase the size of the Fed’s balance sheet? And how would reducing reinvestments reduce the size of the balance sheet? In this post, we answer these questions by describing the mechanics of the Fed’s balance sheet. In our next post, we will describe the balance sheet mechanics with respect to agency mortgage-backed securities (MBS).

Continue reading "How the Fed Changes the Size of Its Balance Sheet" »

Posted by Blog Author at 7:00 AM in Central Bank, Federal Reserve, Monetary Policy | Permalink | Comments (8)

June 30, 2017

The Role of Central Bank Lending Facilities in Monetary Policy



Editor’s note: This post was originally published on June 30, 2017. We are running it again today, August 14, in conjunction with a companion piece scheduled for August 16. An error in the table was corrected on July 3.

LSE_The Role of Central Bank Lending Facilities in Monetary Policy

Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve’s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed’s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks’ counterparty and collateral policies.

Continue reading "The Role of Central Bank Lending Facilities in Monetary Policy" »

Posted by Blog Author at 9:29 AM in Central Bank, Monetary Policy | Permalink | Comments (0)

May 09, 2016

The Turnaround in Private and Public Financial Outflows from China



LSE_2016_china-reserves_klitgaard_460_art

China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank’s purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in. This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China’s currency.


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February 04, 2016

How Do Central Bank Balance Sheets Change in Times of Crisis?



LSE_Blog_monetary_policy_blog_04

The 2007-09 financial crisis, and the monetary policy response to it, have greatly increased the size of central bank balance sheets around the world. These changes were not always well understood and some were controversial. We discuss these crisis-induced changes, following yesterday’s post on the composition of central bank balance sheets in normal times, and explain the policy intentions behind some of them.


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Posted by Blog Author at 7:00 AM in Central Bank, Exchange Rates, Monetary Policy | Permalink | Comments (0)

February 03, 2016

What Is the Composition of Central Bank Balance Sheets in Normal Times?



LSE_Blog_monetary_policy_blog_03

There has been unusually high activity on central banks’ balance sheets in recent years. This activity, which has expanded beyond the core operations and collateral of the central bank, has been called “unconventional,” “nonstandard,” “nontraditional,” and “active.” But what constitutes a normal central bank balance sheet? How does central bank asset and liability composition vary across countries and how did the crisis change this composition? In this post, we focus on the main characteristics of central bank balance sheets before the crisis. In our next piece, we describe how this composition has changed in response to the crisis.


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Posted by Blog Author at 7:00 AM in Central Bank, Exchange Rates, Monetary Policy | Permalink | Comments (2)

May 09, 2014

Crisis Chronicles: Central Bank Crisis Management during Wall Street’s First Crash (1792)

James Narron and David Skeie

As we observed in our last post on the Continental Currency Crisis, the finances of the United States remained chaotic through the 1780s as the young government moved to establish its credit. U.S. Congress was finally given the power of taxation in 1787 and, in 1789, Alexander Hamilton was appointed as the first Secretary of the Treasury. Hamilton moved quickly to begin paying off war debts and to establish a national bank—the Bank of the United States. But in 1791, a burst of financial speculation in subscription rights to shares in the new bank caused a tangential rally and fall in public debt securities prices. In this edition of Crisis Chronicles, we describe how Hamilton invented central bank crisis management techniques eight decades before Walter Bagehot described them in Lombard Street.

Continue reading "Crisis Chronicles: Central Bank Crisis Management during Wall Street’s First Crash (1792)" »

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