Academic journal article Journal of Economics & Management

Balance Sheet Policy of Central Banks in the Conditions of the Exit Strategy of Central Banks

Academic journal article Journal of Economics & Management

Balance Sheet Policy of Central Banks in the Conditions of the Exit Strategy of Central Banks

Article excerpt


The global financial crisis caused that central banks of countries suffering from the financial crisis effects implemented various intervention tools supporting an economic growth and restoring financial stability. Those tools may be divided into two basic groups. The first group includes tools which refer to joint activities of central banks together with legislation and executive authorities. They were created mainly within the scope of so called rescue packages constituting a direct respond of the most important state institutions to the global financial crisis. In that process, central banks did not constitute the main initiating group. It was the governments that through the purchase of equity securities nationalised debts of financial institutions restoring their operational capacity. Central banks exclusively triggered financial support for failing commercial banks. Their rescue activities focused mainly on providing financial liquidity to credit institutions through the open market operations and reference interest rates lowering.

The second group of central banks' tools focused on financial stability and triggering economic growth. Thus, the contemporary world economy has become related to the quantitative easing policy implemented by the biggest central banks. The quantitative easing policy was implemented by them not in the situation when rescue activities and non-standard instruments of the monetary policy did not bring the expected results. It was the quantitative easing policy that caused considerable changes in balance sheets of central banks. It contributed to a never before experienced growth of their volume as well as changes in the so far existing structure of balance assets and liabilities. For that reason, quantitative easing policy is often referred to as the balance sheet policy of central banks.

The study identifies the balance sheet policy of central banks differentiating it from quantitative easing policy. Additionally, the study analyses various types of quantitative easing. The basic and direct goal of the study refers to determining reasons for maintaining the balance sheet policy by central banks together with the assessment of its results.

1. Principles and assumptions of the balance sheet policy of central banks

The balance sheet of the central bank similarly as in case of any other economic activity presents assets and liabilities, whose totals according to the principle of the balance sheet equilibrium shall correspond to each other. The observation of the above mentioned principle requires that all the changes in balance sheet assets of the central bank are reflected in changes of its liabilities and vice versa. Central banks change volumes and structures of their balance sheets through the monetary policy. Thus, their balance sheet policy and monetary policy shall strictly correlate.

Contemporary central banks in their monetary policy concentrate basically on providing liquidity to the banking sector. Thus, their balance sheet assets include various forms of refinancing credits granted to commercial banks. Additionally, contemporary central banks run also the exchange rate policies gathering in their portfolios various foreign assets. Moreover, contemporary central banks offer financing services for the state. They handle its accounts and execute payment orders. Appropriately to the level of possessed autonomy they may also grant credits and loans to such authority. Transactions are associated with equivalent entries shown on the liability side of the central banks' balance sheets. For that reason, the balance sheet of the central bank in its analytical version is presented in the form of the following formula [Polanski 2004, pp. 164-166]:

AZN + KBN + KN = G + RB


AZN - net foreign assets,

KBN - net credit for the budget,

KN - net credit for banks,

G - cash,

RB - liquid bank reserves.

Cash presented in the balance sheet liabilities is emitted by central banks. …

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