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Central Banks in Balance Sheet Recessions: A Search for Correct Response

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These are extraordinary times for central banks. Near zero interest rates and massive liquidity injections are still failing to bring life back to so many economies in the developed world.

If we set the pre-Lehman Shock level as 100, the Federal Reserve has increased monetary base to 347 today, while the Bank of England increased its monetary base to 433 during the same period, all under the lowest interest rates in their modern histories. Yet, the US is still suffering from an unemployment rate of 7.7 percent after four years of zero interest rates, and the UK is in the midst of a double-dip recession. The Bank of Japan has increased its monetary base from 100 in 1990 to 363 today, but instead of facing a triple digit inflation rate, it is facing a deflation. The European Central Bank has brought interest rates down to the lowest level in modern European history, but the unemployment rate at 11.9 percent is at the highest since the introduction of Euro.

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