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The macroprudential role of central bank balance sheets

Author

Listed:
  • Egemen Eren
  • Timothy Jackson
  • Giovanni Lombardo

Abstract

Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets.

Suggested Citation

  • Egemen Eren & Timothy Jackson & Giovanni Lombardo, 2024. "The macroprudential role of central bank balance sheets," BIS Working Papers 1173, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1173
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    References listed on IDEAS

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    More about this item

    Keywords

    optimal monetary policy; central bank balance sheet; government debt; reserves; financial frictions; macroprudential;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G2 - Financial Economics - - Financial Institutions and Services

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