Macro Musings with David Beckworth Claudio Borio on the Future of Central Bank Operating Systems
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Jan 8, 2024 Claudio Borio, Head of the Monetary and Economic Department at BIS, discusses the challenge of large balance sheets at central banks. They explore the shift from the pre-2008 scarce reserve system to the abundant reserve system. They also discuss the political pressure on central bank balance sheets and the implications for fiscal policy.
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How Scarce Reserve Systems Kept Rates Controlled
- Scarce reserve systems keep reserves tight so banks hold them mainly for settlement, making the overnight rate controllable via signaling.
- Claudio Borio explains central banks used open market operations quietly to manage liquidity without altering broader interest-rate structure.
Why Ample Reserves Turn Reserves Into A Store Of Value
- Ample reserve systems convert reserves into a store-of-value, removing the overnight rate's opportunity cost and making rates depend on relative returns.
- Borio likens it to Tobin-Brainer demand where banks hold excess reserves because returns on reserves are near zero.
QE Caused The Shift To Ample Reserve Systems
- The Great Financial Crisis and large-scale asset purchases drove advanced central banks to ample-reserve systems.
- Borio: QE flooded reserves and simplified operations, so central banks stayed in the new regime.