In response to the Global Financial Crisis, central banks engaged in large-scale asset purchases funded by the issuance of reserves. These “unconventional” policies continued during the pandemic, so that by 2022 central banks’ balance sheets had grown up to ten-fold. As a result of rapidly increasing interest rates, these massive portfolios began producing substantial losses. We interpret these losses as fiscal policy consequences of quantitative easing and stress that they must be balanced against the prior benefits of implementing purchase policies. Importantly, losses differ qualitatively depending on whether the central bank chooses to buy domestic or foreign assets, thus resulting in transfers either within or between countries. Effects of losses may differ due to accounting rules (when losses are realized) and when the fiscal authority compensates for losses (the structure of indemnification agreements). Data from the Federal Reserve, the Eurosystem, and the Bank of England show that maximum annual losses are between 0.3 and 1.5 percent of GDP. By contrast, the Swiss National Bank is sustaining losses up to 17 percent of GDP.
Authors
- Acknowledgements & Disclosure
- Cecchetti is Professor and Rosen Family Chair in International Finance at the Brandeis International Business School, Senior Research Consultant at King’s College London Business School, Chair of the Advisory Scientific Committee of the European Systemic Risk Board, Research Associate at the NBER, and Research Fellow at the CEPR; Hilscher is Professor of Agricultural and Resource Economics at the University of California, Davis. This paper was prepared for the workshop on “Central bank capital in turbulent times,” sponsored by De Nederlandsche Bank in Amsterdam on 11-12 April 2024. We thank Nazim Belhocine, Ashok Vir Bhatia, Jan Frie, Andrew Levin, Fergal Shortall, and Christina Paragon Skinner, for helping us with the data; Swarali Havaldar for research assistance; seminar participants at King’s Business School, the London Business School, and UC Davis, as well as David Aikman, Ricardo Reis, Kim Schoenholtz, and Jeremy Stein for comments and discussions. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32478
- Published in
- United States of America