Sunday, January 15, 2012

Monetary accommodation in a graphic

As historians look back on the sub-prime mortgage meltdown and the Great Recession, one of the things sure to receive considerable attention is the dramatic expansion of central bank balance sheets in their aftermath. As the credit markets froze, central banks emerged as lenders, insurers, and even buyers of last resort in an effort to backstop the slide and maintain financial market stability.

The graphic below captures the true magnitude of the balance sheet expansion by central banks acros developed economies. It is four years old and there are no signs of any exit.



Fortunately, fears of inflationary expectations being unhinged and bond-market vigilantes wreaking havoc have so far proven unfounded.

Update 1 (16/1/2012)

Economist has an excellent graphic and article on the extraordinary monetary accommodation being carried out by central banks across advanced economies.


Update 2 (2/5/2012)

Martin Wolf has this graphic that highlights the dramatic changes that have swept central banking in recent past.









Update 3 (8/5/2012)

Gavyn Davies on the difference between monetary base and monetary aggregates and why the expansion in monetary base does not always lead to inflation,
These are very different types of “money”. The monetary base is mostly the reserves of the commercial banks held at the central bank. M1-M4 are mainly deposits of varying maturity held by the public at the commercial banks. The monetary base can behave very differently from the wider aggregates, and with very different consequences for the economy at large.
 
The recent rise in the monetary base has occurred because the central banks have purchased sovereign debt from the commercial banks, and have credited the banks with reserve balances at the central banks to settle these transactions. Since the commercial banks have simultaneously wanted to increase their holdings of liquid balances in the safest possible form, in order to secure their future funding requirements, these balances have simply remained at the central bank doing nothing...

Monetarist models of the economy generally assume that there is a fixed ratio between the monetary base and M1-M4...The fixed relationship between base money and M1-M4 applies when bank lending is constrained by reserve requirements and banks are eager to increase their lending. In those circumstances, a rise in the monetary base or banks’ reserve assets leads to an automatic “multiplier” rise in bank lending, and then in the bank deposits which comprise the M1-M4 monetary aggregates. None of this is happening now, since bank lending is not constrained by reserve requirements and banks do not want to lend.


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