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Expansion of central bank balance sheets the cause of shooting price of gold


Relative to before the financial crisis, the Federal Reserve's asset holdings are currently about 3.3 times larger. Initially, the source of that increase was the collateral associated with various temporary lending facilities that the Fed used to address the financial panic. Those assets were then replaced on net by purchases under the first large-scale asset purchase program in 2009. Then in late 2010, asset holdings increased further as a result of a second large-scale asset purchase program.

Of course, size isn't everything. While it might be tempting to try and interpret the change in the size of the central bank's balance sheet as a summary statistic of the degree of monetary policy accommodation, as Dave Altig's post points out, that interpretation is not so straightforward. Increasing the size of the balance sheet is not the only thing a central bank can do to ease monetary policy when short-term interest rates are very low. For example, in late 2011 the Fed began a maturity extension program that changed the composition of the assets on the balance sheet, but this program did not materially alter the size of the balance sheet.

With this caveat in mind, the following chart compares the proportionate changes in the size of asset holdings of five central banks over the period from the first quarter of 2007 through the first quarter of 2012: the Federal Reserve (FR), the Bank of England (BE), the European Central Bank (ECB), the Bank of Canada (BC), and the Bank of Japan (BJ).

Central Bank Asset Holdings

One take-away from the chart is the large variation from country to country. Here are some observations:

  1. Bank of England: Through mid-2011, the proportionate increase in the Bank of England's asset holdings was roughly similar to the Fed's. But then the Bank of England began a second round of large scale asset purchases that sharply increased the size of its balance sheet. By the first quarter of 2012, the Bank of England's asset holdings were about 4.2 times as large as they were before the financial crisis.

  2. European Central Bank: Through mid-2011, the ECB's asset holdings were about 1.7 times their precrisis level. But the sharp increase in the ECB's longer-term lending programs in recent months has resulted in a large increase in the size of ECB's balance sheet. By the first quarter of 2012, the ECB's asset holdings were about 2.5 times what they were before the financial crisis.

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