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 29680, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Central bank balance sheet expansion is run through commercial banks. While liquid central bank reserves held on commercial bank balance sheets increase, 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 systemic liquidity than typically thought, and in fact, the demand for liquidity can occasionally exceed available reserves, exacerbating liquidity stress.

JEL-codes: E0 G0 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-mac and nep-mon
Note: CF IFM ME
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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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