Long form for a blog post that is. It looks to clock in at around 900 very smart words, quotes included.
I wasn't kidding with last month's "Why You Really, Really Want to Listen to the Bank for International Settlements" and apparently the FT's Izabella Kaminska checks in with them too.
From FT Alphaville:
The cost of global central bank balance sheet expansion
From a speech by Jaime Caruana, the general manager of the Bank for International Settlements, given at the Bank of Thailand-BIS conference on December 12:
A stylised central bank balance sheet can be helpful in clarifying the various transmission channels (Table 1). Any accumulation of assets implies an increase in corresponding liabilities. In addition, the purchase of domestic assets will directly affect their prices and therefore credit spreads, term premia and long-term interest rates. An increase in monetary liabilities – eg reserve money – will have implications for the liquidity of the banking sector in the short run, and this may undermine price stability in the medium term. But an increase in long-term liabilities could also crowd out lending to the private sector.Taking into account these transmission channels, it is quite clear that large expansions of central bank balance sheets have implications for both the real and financial sectors of the economy. They do create risks – and we must watch these closely. In some historical episodes, central banks did expand their balance sheets too much in order to finance profligate government spending. This often had inflationary results. On other occasions, central banks were too slow in reversing expansionary policies when conditions improved.Undoubtedly, a veiled hint that what China’s central bank, the PBOC, has been doing over the years with its foreign exchange intervention is akin to a giant quantitative easing programme.
And the same is also true of other Asian central banks, all of whom have also been expanding their balance sheets since the Asian financial crisis of 1997 on the assumption that a large amount of foreign reserves will be able to protect them against future crises.
To compensate for this mega-QE binge — largely focused on the purchase of foreign assets — central banks have used instruments such as reserve requirements to the issuance of sterilisation bonds to try and neutralise the liquidity....MORE