‘Flood’ of reserves may not boost liquidity, say Acharya and Rajan
Central bank balance sheet expansion could harm liquidity in some cases, former RBI officials find
Central banks that “flood” the financial system with liquid reserves might not succeed in tackling liquidity risks, according to research by Viral Acharya and Raghuram Rajan.
The former senior Reserve Bank of India officials say in the working paper that at first glance, central bank balance sheet expansion would seem to increase the supply of reserves, lower illiquidity premia and cut the cost to firms of financing. “Yet this view neglects three key private sector responses,” they write.
Firs
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