Since the global financial crisis of 2008-2009, a balance sheet focus is sometimes the benchmark by which the conduct of monetary policy that relies on non-standard measures is assessed. This paper explores this metric by examining the challenges of interpreting the conduct of monetary policy in recent years. It concludes that while the shift in emphasis toward the balance sheet of a central bank is understandable, it is a hazardous exercise, and this can lead some observers to exaggerate the significance attached to changes in balance sheet composition over time. Accounting standards differ greatly across countries, and the degree of transparency about balance sheet details also varies considerably in the more than 30 economies examined in this study. A global effort to improve the availability, timeliness and quality of central bank balance sheet data remains too much of a work in progress more than 10 years since the financial crisis erupted. Finally, as balance sheet interventions have also been used to address financial system stability concerns, the paper explores whether there is a trade-off between financial stability and the objectives of monetary policy. It finds that balance sheet expansions are associated with higher output volatility, and that central banks’ ability to minimize inflation and output variability may have been impaired by the pursuit of global financial stability conditions. These results suggest more, not less, global monetary and financial policy cooperation is needed to improve macroeconomic outcomes.
Central Bank Balance Sheets and the Interaction between Monetary Policy and Financial Stability
CIGI Paper No. 193