christian noyer : the size of central bank balance sheet – how relevant ( important ) is it? speech by mr christian noyer, governor of the bank of france and chairman of the board of directors of the bank for international settlements, at the gic ( global interdependence center ) / bank of france annual seminar “ new policies for the post crisis era ”, session i “ putting a context on monetary policy – on both sides of the pond ”, paris, 23 march 2015. * 1. * * a widespread increase in cb balance sheet in all major economies, central banks ’ balance sheets have dramatically increased in size and as a percentage of gdp. that movement was temporarily reversed in the euro area, but our balance sheet is set to increase again following the recently decided - and implemented – asset purchase programs, most notably the public sector purchase programme ( pspp ). since 2007, the aggregate size of central banks ’ balance sheets over the world has tripled, reaching the amount of 22 trillion dollars at the end of 2014. interestingly, this increase has been almost equally split between advanced and emerging economies. in advanced countries, central banks have acquired domestic assets. on average, their balance sheets have grown from 10 to 20 % of gdp over the last seven years. in emerging economies, accumulation of foreign exchange reserves accounts for most of the expansion. situations remain very diverse among advanced economies : while the balance sheet of the bank of canada amounts to 5 % of its nation ’ s gdp, the swiss national bank holds assets equivalent to 80 % of the swiss gdp. discretionary and technical factors both explain those differences and evolutions. the former holds for countries that choose to accumulate foreign exchange reserves. the latter is topical in the case of the euro area : the ecb ’ s balance sheet performs an intermediation function between national central banks through the so - called target 2 system. so, as a mechanical phenomenon, balances in the system tend to grow in times of market segmentation i. e. an impaired interbank market and strong capital flows inside the euro area. similarly, conducting monetary operations via open market or via repos makes the size of the balance sheet more or less dependent on the size of the interbank market. however, the recent increase in size mainly results from a shift in the monetary policy regime. central banks have taken a proactive – rather than purely passive – approach to their balance sheets. they have, according to the common parlance, “ put

downward moves in asset prices on demand may be larger due to the greater negative impact of deflation on the net worth of borrowers — witness the united states in the 1930s or japan in the 1990s, the case for adjusting monetary policy in response to negative asset price shocks is commonly considered more compelling than in the alternative context. but this does not mean that monetary policy should generally ignore the effects of increases and only respond to observed declines in asset prices. the test should be the size and circumstances of the asset price moves and their impact on the forecast relative to the central banks ’ objectives, not the direction of the asset price move. different considerations apply in the circumstances where the central bank is considering how a potential future move in asset prices may affect the forecast. these circumstances call for even greater caution and care. here is it very important that the forecasts central banks consider in making monetary policy decisions are explicit about assumptions for future asset price movements, the uncertainty that surrounds them, the sensitivity of the forecast to alternative assumptions, and the costs and consequences of alternative paths for monetary policy. even in circumstances where asset prices may appear to have moved away from fundamentals, and it seems reasonable to consider the implications of some deceleration in the pace of future increase or some decline, central banks need to be very cautious about adjusting policy in anticipation of that event, much less directing policy at inducing it. the substantial uncertainty about the path of asset price movements going forward necessarily reduces the case for altering policy in advance of the move. consider the case in which it seems prudent for the central bank to incorporate an assumption for a significant move in the rate of change in future asset prices into its forecasts for output and inflation. if the central bank ’ s assumption is that asset prices are likely to fall over the forecast horizon, perhaps in the wake of a sustained rise in those prices, then it might in turn forecast a softer path for aggregate demand. these changes in the outlook might imply a lower expected path for the target rate than would have been implied by a different assumed path for the behavior of asset prices. if it turns out that the anticipated fall in asset prices does not materialize, the policy constructed under the assumption of a decline will likely have been too easy, and that might itself contribute to further rises in asset prices. this might sound like a more or less generic statement about the perils of having to make policy based on forecasts, but there is a sense in which the forecasting of asset prices