How central banks have used their balance sheets through history
This paper by Ferguson et al. provides historical data aggregating trends, drivers, and the full range of policy precedents associated with central bank balance sheets. Their analysis is based on a new empirical dataset that reconstructs central bank balance sheets for advanced economies over multiple centuries using primary and secondary sources, on an annual basis, including the full breakdown of asset and liability components for most of history. Some of their findings include:
- Contrary to common beliefs that central banks were “passive” prior to the 1970s, Ferguson et al. show that the most recent balance sheet expansions are dwarfed by central bank activity during the first era of globalization while involvement in government debt markets has been stronger during many episodes.
- Balance sheets relative to aggregate output have reached exceptional levels in the post-2008 era, but the picture is much more mundane when scaling central bank assets to the size of the financial sector.
- Liquidity provisions during financial stress induce moral hazard dynamics. While liquidity provisions support the economy and hasten recoveries in the short run, they also substantially shorten the time to the next crisis, probably because banks “feel that downward risks of risky investment strategies are capped by a publicly-provisioned “safety tool” in the form of central bank liquidity.”
Central Bank balance Sheets and the Macroeconomy, 1587-2020
Authors: Niall Ferguson, Martin Kornejew, Paul Schmelzing, Moritz Schularick
From: Stanford University, University of Bonn, Yale School of Management, Sciences Po
