Liquidity, liquidity everywhere, not a drop to use - Why flooding banks with central bank reserves may not expand liquidity

Viral Acharya and Raghuram Rajan

No 16907, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Central bank balance sheet expansion, through actions like quantitative easing, is run through commercial banks. While this increases liquid central bank reserves held on commercial bank balance sheets, 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 additional liquidity than typically thought, and in fact, may increase the probability and severity of episodes of liquidity stress.

Keywords: Quantitative easing; Central bank balance sheet; Financial stability; Repo rate spike; Liquidity hoarding; Liquidity dependence; Margin requirements; Capital requirements (search for similar items in EconPapers)
JEL-codes: E5 G01 G2 (search for similar items in EconPapers)
Date: 2022-04
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Working Paper: Liquidity, Liquidity Everywhere, Not a Drop to Use – Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity (2022)
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