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What happens when a central bank like the Federal Reserve expands its assets? Is there any...

What happens when a central bank like the Federal Reserve expands its assets? Is there any upper limit to a central bank’s assets? Why?

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Expansion of Central bank Assets.

  • The central bank's asset are Securities from Treasuries, Foreign exchange reserves in the form of foreign bonds issued by foreign governments and Loans to Commercial banks
  • The central bank's liabilities are Currency in circulation and Bank reserves held at commercial banks.
  • During Economic crisis the Fed can expand its balance sheet by buying more assets.
  • Fed buys assets as a part of its monetary policy action whenever it intends to increase the money supply for keeping the interest rate closer to the target the Fed fund rate.
  • Quantitative Easing (QE) is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market to lower interest rates and increase money supply.

Limit of Central bank's Asset.

  • There is No Upper or Lower limits up to which the Fed can expand the balance sheet.
  • The balance sheet is automatically expands when Fed buys assets.
  • The balance sheet is automatically contracts when the Fed sells the Assets.
  • There is a limit beyond which the Fed can't contract its balance sheet.

ekkarill92 answered 1 year ago
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