Central Bank Balance Sheet and Real Business Cycles

Mustapha Abiodun Akinkunmi, PhD, is a Financial Economist and Technology Strategist. He has over twenty-five years of experience in estimation, planning and forecasting using statistical and econometrics methods, with particular expertise in risk, expected utility, discounting, binomial-tree valuation methods, financial econometrics models, monte carlo simulations, macroeconomic, and exchange rate modeling. He has done extensive software development on quantitative analysis of capital markets, revenue and payment gateway, predictive analytics, data science and credit risk management. Dr. Akinkunmi has implemented change management programs and institutional development initiatives in both public and private sector organizations and has served in high profile positions as a Consultant, Financial Advisor, Project Manager and Business Strategist to AT&T (Bell Labs), Salomon Brothers, Goldman Sachs, Phibro Energy, First Boston (Credit Suisse First Boston), World Bank, Central Bank of Nigeria and Information Connectivity Solutions Limited. He is an internationally recognized author and leader in demand analysis, specializing in working with very large databases. Dr. Akinkunmi is the founder of Technology Solutions Incorporated (TSI) in New York, which focused on data science and software application development for clients including major financial services institutions. He has conducted teaching and applied research in areas that include analyses of expenditure patterns, inflation and exchange rate modeling for Manhattan College, Fordham University and American University, Yola, Nigeria.

• Chapter 1: Global Genesis of the Central Bank  1 1.1 Origin of the Central Bank  1 1.2 Roles of the Central Bank  1 Questions  3 Chapter 2: Relevance of the Central Bank Balance Sheet  5 2.1 Understanding Relevance of Central Bank Balance Sheet in Functions of Economy  5 2.1.1 Similarities and Differences between a Company’s Balance Sheet and a Central Bank Balance Sheet  5 2.2 Trajectory Relevance of the Central Bank Balance Sheet  8 2.3 Externality of the Central Bank Balance Sheet Size  12 Questions  13 Chapter 3: Components of Central Bank Balance Sheets  15 3.1 Factors Influence the Reporting Frequency of Central Bank Balance Sheets  17 3.2 Components of Central Bank Assets and their Composition Analysis  18 3.2.1 Foreign Assets  18 3.3 Components of Central Bank Liabilities and their Composition Analysis  20 3.3.1 Banknotes  21 3.3.2 Commercial Bank Reserves  23 3.3.3 Capital  23 Questions  25 Chapter 4: Analytical Framework of Central Bank Balance Sheets  27 4.1 Structure of Central Bank Balance Sheets  27 4.2 Balance Sheet Indicators  28 4.2.1 Computation of Indicators  28 4.2.2 Significance of these Indicators  29 4.2.3 Underlying Assumptions of Four Indicators  29 4.3 Determinants of Central Bank Balance Sheet Composition  30 4.4 Classification of Central Bank Balance Sheet Components  31 4.5 Theoretical Landscape: Quantity Theory of Money versus Quality Theory of Money  32 4.5.1 Quantity Theory of Money  32 4.5.2 Quality Theory of Money  34 Questions  39 Chapter 5: Evolution of Central Bank Balance Sheets and Their Heterogeneous Dimensions  41 5.1 What Makes Central Bank Balance Sheets Special?  41 5.2 Historic Uses of Central Bank Balance Sheets  43 5.3 Composition of Central Bank Balance Sheet Liabilities  44 5.3.1 Central Bank Liabilities in Normal Times  45 5.3.2 Snapshot of Selected Economies’ Performance before the 2007–008 Crisis  46 5.3.3 Country-by-Country Snapshots of Economic Structure Since 2005  47 5.3.4 A Look at the Balance Sheets: 2005 and 2006  56 5.3.5 Snapshot of Selected Economies’ Performance during the 2007–008 Crisis  65 5.3.6 Snapshot of Selected Economies’ Performance Today  74 5.3.7 Central Bank Liabilities Today  78 Conclusion  86 Questions  86 Chapter 6: Composition of Central Bank Balance Sheet Assets  87 6.1 Central Bank Assets in Normal Times  87 6.1.1 Central Bank Assets of Emerging Economies  95 6.2 Central Bank Assets During the 2007–2008 Crisis  96 6.2.1 Central Bank Assets of Developing and Emerging Economies during the 2007–2008 Crisis  104 6.3 Central Bank Assets Today  104 6.3.1 Central Bank Assets of Emerging Economies Today  112 6.4 Asset-Side Composition and Economic Growth Nexus  115 6.4.1 Asset-Growth Nexus before the 2007–2008 Crisis  115 6.4.2 Asset-Growth Nexus during the 2007–2008 Crisis  116 6.4.3 Asset-Growth Nexus after the 2007–2008 Crisis  116 6.5 The Evolution of Central Bank Balance Sheets in the Future  117 Questions  119 Chapter 7: Financial Ratios of the Central Bank Balance Sheet  121 7.1 International Strength  121 7.2 External Strength Ratio  122 7.3 External Impact Ratio  123 7.4 Liquidity Ratios I, II, and III  123 7.4.1 Liquidity Ratio I  124 7.4.2 Liquidity Ratio II  124 7.4.3 Liquidity Ratio III  124 7.5 Equity Ratio  125 Questions  126 Chapter 8: Central Bank Operations  127 8.1 Types of Central Bank Operations  127 8.1.1 Supply Liquidity  127 8.1.2 Absorb Excess Liquidity  127 8.1.3 Asset Securities  128 8.1.4 Off Balance Swap  131 8.2 Central Bank Policy Instruments  131 8.2.1 Open Market Operations  131 8.2.2 Reserve Requirements  132 8.2.3 Discount Rate  134 8.2.4 Money Market Investor Funding Facility  135 8.2.5 Term Auction Facility  136 8.2.6 Commercial Paper Funding Facility  137 8.2.7 Primary Dealer Credit Facility  140 8.2.8 Recap of Policy Instruments  141 Questions  141 Chapter 9: Real Business Cycles  143 9.1 The RBC Model  143 9.1.1 Features of RBC Models  144 9.1.2 Basic Economic Factors  145 9.1.3 Fluctuations in the Business Cycle  145 9.1.4 Boom and Recession  145 9.2 Concept of RBCs Applied to Economic Policy  149 9.3 Techniques of Estimating RBCs  150 9.4 Methods to Estimate Potential Output and Output Gaps  151 9.4.1 Trending Methods  152 9.4.2 Univariate Filters Method  153 9.4.3 Multivariate Filters  156 9.4.4 Production Function Approaches  157 9.4.5 Criteria for Evaluating Different Methods of Estimating Potential Output  161 Questions  165 Chapter 10: Central Bank Balance Sheets and Real Business Cycles  167 10.1 Linkages between Central Bank Balance Sheets and Real Business Cycles  167 10.1.1 Monetary Policies and Business Cycles  168 10.1.2 Identifying an Acceptable Range of Values  169 10.1.3 Asset Transparency  170 10.2 Impact Evaluation of Central Bank Balance Sheets on Economic Environment  171 10.2.1 Central Bank Balance Sheets and Debt Management  172 10.2.2 Modeling Challenges Confronting Central Bank Balance Sheets  173 Questions  177 Chapter 11: Conclusion  179 Questions Left Unanswered: Areas for Future Research  180 Policy Debates  181 Appendix I: Central Bank Balance Sheets of Different Countries  183 Asia Region  183 Malaysia’s Central Bank Balance Sheets for the Month of February 2018  183 Monetary Authority of Singapore  184 Africa Region  185 Nigeria’s Central Bank Balance Sheets for the Month of November 2017  185 South America  186 Central Reserve Bank of Peru  186 Brazil  188 Chile  189 Argentina  190 North America  193 Mexico  193 Canada  194 United States  195 Appendix II: Abbreviations  197 References  199 Index  205