The Size of Central Bank Balance Sheet and Interest Rates Before and After the Global Financial Crisis

This paper investigates changes in the central bank policy interest rate and the size of the central bank balance sheet, in both advanced and developing countries, that occurred after the Global Financial Crisis erupted. It firstly discusses the unconventional monetary policies and the use of the balance sheet as a monetary policy tool. Later, it investigates whether central banks around the world reached the zero lower bound and if they expanded their balance sheets extensively. The objective of this study is two-fold. Firstly, it investigates whether the central bank balance sheet became a policy instrument only in a few countries that had reached the zero lower bound. Secondly, it estimates effects of changes in the size of the balance sheet on the ten-year government bond yield. The linkage between the balance sheet effect and the zero lower bound seems to be present in the data. The results show that the significant inverse effect of the changes in the size of the central bank balance sheet on the ten-year government bond rate occurred in countries which reached the zero lower bound and which expanded their balance sheets extensively. Overall, the comparison between high-income economies and their low-income counterparts shows that the zero lower bound and the expansion of balance sheet were predominantly concerns for high-income countries.