Research / BFI Working PaperAug 15, 2023

Liquidity, Liquidity Everywhere, Not a Drop to Use: Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity

Viral V Acharya, Raghuram Rajan

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.

More Research From These Scholars

BFI Working Paper Jun 15, 2023

Finance and Climate Resilience: Evidence from the Long 1950s US Drought

Raghuram Rajan, Rodney Ramcharan
Topics:  Energy & Environment, Financial Markets
BFI Working Paper Aug 15, 2023

Sovereign Debt and Economic Growth When Government is Myopic and Self-interested

Viral V. Acharya, Raghuram Rajan, Jack Shim
Topics:  Fiscal Studies, Financial Markets
BFI Working Paper Mar 17, 2020

Kill Zone

Sai Krishna Kamepalli, Raghuram Rajan, Luigi Zingales
Topics:  Industrial Organization