Question

What were the largest items on each side of the US Central Bank balance sheet before and during the Great Recession? What are the largest items these days?

Answer 1

Solution:

The Central bank's balance sheet is composed of assets and liabilities. The Central bank's assets include public securities and national bank loans, and liabilities are in storage in the US currency. During the Great Depression, the Central bank's balance sheet became very complicated. The Fed would raise its balance sheet by issuing more money and using the capital to purchase Treasury securities on the open market. The Fed's balance sheet increased by $3.5 trillion during the Great Depression due to buying bonds. At the end of the Great Depression, the balance sheet became $4.5 trillion, 25 percent of GDP.

During the great recession, the Fed has agreed to keep its balance sheet more prominent than before the financial crisis, as the demand for the currency rises as the economy grows. In order to deal with significant shocks like that in 2008, banks are expected to maintain ample cash reserves. Therefore, the big change was that the financial system had significant reserves. Currency in circulation had been the responsibility of the Fed in 2007.

After the recession, central banks adopted quantitative easing policies by reducing their interest rate, with a view to improving the economy. One goal was to raise reserve supplies. The Fed raised the reserves of the financial system through its asset-buying program.