The Safety Net: Central Bank Balance Sheets and Financial Crises

Niall Ferguson, Martin Kornejew, Paul Schmelzing, Moritz Schularick and Moritz Schularick

No 17858, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Across history, central banks have used their balance sheets as lenders of last resort (LLR) to stabilize the financial system during crises. We study the evolution and fluctuation of central bank balance sheets since the 1600s and assess the aggregate effects of liquidity interventions. Using plausibly exogenous variation in the likelihood of crisis interventions induced by ex ante beliefs of central bank governors allows us to show that LLR interventions systematically mitigate financial crises and accelerate macroeconomic recoveries. However, we also present evidence that such interventions raise risks of future boom-bust cycles in the financial system.

Keywords: Central; bank; balance; sheet (search for similar items in EconPapers)
JEL-codes: G01 G15 G21 N20 (search for similar items in EconPapers)
Date: 2023-01
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