tuomas valimaki : what is the optimal size of central bank balance sheets? introductory remarks by mr tuomas valimaki, board member of the bank of finland, at the omfif seminar " the new era of central bank policy and operations ", frankfurt am main, 19 march 2023. * * * introductory remarks of the session on navigating quantitative tightening first, i would like to thank the organizers for inviting me here today to discuss a topic close to my heart : monetary policy implementation. the timing for this discussion is excellent, as last week the ecb governing council took some important decisions on the way forward on this frontier. not only did it make this subject extremely topical, but had the preparation still been ongoing, i believe it would have been simply impossible for me to participate in this event. now, i will briefly introduce the basic logic behind my thinking on one of the topics of this session : the natural size of central bank balance sheet. in addition, as the eurosystem's current balance sheet seemingly exceeds its natural size, i will reflect my views on the future path for the balance sheet : does our original thinking still stand after some 25 years. the fundamental building blocks of a central bank balance sheet result from the core tasks pledged to the central bank itself. in addition to maintaining price stability and supporting financial stability, these tasks often include functions like the issuing of banknotes as well as holding the country's official foreign currency reserves. these elements are also the ones that determine the natural size of the central bank balance sheet. as they are not directly related to the making of monetary policy, we often call them autonomous liquidity factors, and take their developments as given. in a large economy that issues a reserve currency, the demand for banknotes is likely to exceed the level of foreign reserve holdings needed. in such a case, the autonomous central bank liabilities tend to exceed assets, and so, the liability side determines the size of the balance sheet. this is certainly the case for the eurosystem. the demand for euro cash is currently more than 1 500 billion euros, whereas the level of fx holdings is less than 300 billion euros. 1 the case is even clearer, if one takes into account that we have always asked banks to hold minimum reserves with the eurosystem, the public sector is allowed to hold deposits with national central banks and some foreign central banks hold part of their euro reserves with the eurosystem. based on this

matti vanhala : challenges for finnish economic policy in an unstable international environment abstract of a speech by mr matti vanhala, governor of the bank of finland, at the conference “ monetary policy in 2004 ”, helsinki, 9 october 2003. * * * global economy it would appear that global economic recovery is under way at last. the latest economic data from the united states is more convincing, and economic activity in asia is relatively brisk. economic developments in russia also deserve a mention, and there is a sense of improved optimism both in europe and the euro area as a whole. it therefore seems likely that we will obtain robust growth figures on a global level in the near future. why, then, do i then refer to an ” unstable international environment ” in the title of my speech? the reason is that despite the favourable short - term outlook, sustainable recovery is being affected by a number of uncertainties. global economic expansion is starting to gather speed in exceptionally unstable circumstances. extremely strong expansionary fiscal and monetary policies are the lifeline of industrial countries. although such strong expansionary measures can set recovery in motion, they alone do not create sustainable growth. euro area monetary policy confidence indicators show that euro area companies ’ expectations on economic activity have improved significantly. concerns over deflation have receded, and inflation expectations have stabilised. in light of this, the stance taken by the ecb ’ s monetary policy is lax. euro area central banks are now offering money at the lowest rate ever in the history of open financial markets. furthermore, banks ’ real lending rates are also extremely low. there is no evidence, nor are there any indications, to suggest that the price of financing would prevent investments in any of the euro area countries. expansionary fiscal policy measures are not the answer to euro area problems the failure of one or several euro area countries to pursue sustained fiscal policies that have been accommodated to given cyclical conditions is a very serious matter. although adverse effects will be felt throughout the monetary union, the most severe consequences arising from a strong deterioration of public finances will be caused to the countries themselves. public finances, within the problematic countries, should be stabilised within a reasonable time span by introducing a fiscal policy geared to restrict the growth of public spending. where this can be achieved, the stability and growth pact has worked the way it was intended. however, it has also been suggested that the present uncertain economic situation requires fiscal policy measures in euro area countries that are expansionary in nature. references have