Central Bank Balance Sheet and Real Business Cycles

Chapter 6 Composition of Central Bank Balance Sheet Assets

Central banks obtain assets through purchasing assets or making loans. If a central bank buys an asset, for example, a bond, it makes a payment by creating reserves or currency. This leads to an increase in its assets and liabilities by equal amounts. In the same vein, a central bank creates the new reserves that are lent if it spreads a loan. Banks are often considered as central bank’s counterparties, but some central banks accept nonbank counterparties. In a normal period, central banks’ assets mainly consist of government bonds, foreign exchange reserves, and loans to banks. Nevertheless, the relative significance of these assets differs substantially across central banks. Before ...