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Podcast: Paul Fisher on the future of balance sheet policy

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Central banks will need to think hard about the composition of their balance sheets as well as their size, says Paul Fisher, a former senior official at the Bank of England.

Fisher, now a fellow of the Cambridge Institute for Sustainability Leadership and senior adviser to Oliver Wyman, says the issue of balance sheet composition is a “really interesting question” facing central banks.

Although monetary policy is primarily focused on the scale and maturity of assets on the balance sheet, adjusting the composition of assets can bring important financial stability benefits. For example, a central bank might choose to support liquidity in certain market segments.

“You do actually have a macro-prudential, or financial stability-type instrument at your disposal,” Fisher tells Central Banking.

Central banks in advanced and emerging economies used asset purchases in this way during the Covid-19 shock, helping to calm particular markets that were under stress. At least for those who were conducting outright asset purchases, this meant the tool had both monetary and financial stability implications.

This throws up governance challenges. “The big problem really comes with the fact that we don’t have very many financial stability instruments, and the governance of them can be quite variable across countries,” says Fisher.

The BoE employs a governance structure in which some policy-makers sit on both financial stability and monetary policy committees, which helps co-ordination. Fisher also notes there is “differential government involvement”. A representative from the Treasury sits on some committees, but not all – notably avoiding the prudential regulation committee.

 

Index

1:07 Balance sheets and fiscal policy

2:59 Are big balance sheets here to stay?

6:23 Paying interest on reserves

8:00 Compositional questions

11:00 Interplay between policy tools

14:28 Climate change

17:40 Is there an ideal form of independence?

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