Working Paper: NBER ID: w29680
Authors: Viral V. Acharya; Raghuram Rajan
Abstract: Central bank balance sheet expansion is run through commercial banks. While liquid central bank reserves held on commercial bank balance sheets increase, demandable uninsured deposits issued to finance the reserves also increase. A subsequent shrinkage in the central bank balance sheet may entail a shrinkage in bank-held reserves without a commensurate reduction in deposit claims. Furthermore, during episodes of liquidity stress, when many claims on liquidity are called, surplus banks may hoard reserves. As a result of such bank behavior, central bank balance sheet expansion may create less systemic liquidity than typically thought, and in fact, the demand for liquidity can occasionally exceed available reserves, exacerbating liquidity stress.
Keywords: liquidity; central bank; reserves; bank behavior; systemic liquidity
JEL Codes: E0; G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank balance sheet expansion (E58) | systemic liquidity (E51) |
| central bank reserves (E58) | bank behavior (G21) |
| bank behavior (G21) | systemic liquidity (E51) |
| banks hoard reserves (E58) | demand for liquidity exceeds available reserves (E51) |
| liquidity stress (G33) | banks withdraw cash from reserves (G21) |
| central bank reserves (E58) | interbank borrowing costs (G21) |
| reserve expansion (E51) | vulnerability to liquidity shocks (E44) |