Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets

Rajan thanks the Fama-Miller Center at the Booth School and the Hoover Institution for research support. Steffen is grateful for financial support from the BMWi and DLR. We are grateful to Gara Afonso, Ryan Banerjee, Richard Berner, Wenxin Du, Michael Fleming, Florian Heider, Martin Hiti, Anil Kashyap, Gabriele La Spada, Lorie Logan, Stephan Luck, Thomas Mertens, Emanuel Moench, Bill Nelson,Jose-Luis Peydro, Charlie Plosser, Rodney Ramacharan, Asani Sarkar, Andrei Shleifer, Jeremy Stein, Paul Tucker, Bruce Tuckman, Quentin Vandeweyer, attendees at the Federal Reserve Bank of Kansas Jackson Hole Economic Symposium in August 2022 on “Reassessing Constraints on the Economy and Policy”, and seminar participants at various central banks, conferences, policy think-tanks and universities, for helpful comments. An early draft of this paper was named “Liquidity Dependence: Why Shrinking Central Bank Balance Sheets is an Uphill Task”. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

• data appendix

• March 15, 2023