Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • 2016
  • Article
  • Jackson Hole Economic Symposium Conference Proceedings (Federal Reserve Bank of Kansas City)

The Federal Reserve's Balance Sheet as a Financial-Stability Tool

By: Robin Greenwood, Samuel Gregory Hanson and Jeremy C. Stein
  • Format:Print
ShareBar

Abstract

We argue that the Federal Reserve should use its balance sheet to help reduce a key threat to financial stability: the tendency for private-sector financial intermediaries to engage in excessive amounts of maturity transformation—i.e., to finance risky assets using dangerously large volumes of runnable short-term liabilities. Specifically, we make the case that the Fed can complement its regulatory efforts on the financial-stability front by maintaining a relatively large balance sheet, even when policy rates have moved well away from the zero lower bound (ZLB). In so doing, it can help ensure that there is an ample supply of government-provided safe short-term claims—e.g., interest-bearing reserves and reverse repurchase agreements (RRP). By expanding the overall supply of safe short-term claims, the Fed can weaken the market-based incentives for private sector intermediaries to issue too many of their own short-term liabilities. And crucially, we argue that the Fed can crowd out private-sector maturity transformation in this way without compromising the ability of conventional monetary policy to focus on its traditional dual mandate of promoting maximum employment and stable prices.

Keywords

Central Banking; Policy; Risk Management; Public Administration Industry; United States

Citation

Greenwood, Robin, Samuel Gregory Hanson, and Jeremy C. Stein. "The Federal Reserve's Balance Sheet as a Financial-Stability Tool." Jackson Hole Economic Symposium Conference Proceedings (Federal Reserve Bank of Kansas City) (2016): 335–397.

Supplemental Information

Internet Appendix
  • Read Now

About The Authors

Robin Greenwood

Finance
→More Publications

Samuel G. Hanson

Finance
→More Publications

More from the Authors

    • February 2023
    • Faculty Research

    Success Academy Charter Schools

    By: Robin Greenwood, Joshua D. Coval, Denise Han, Ruth Page and Dave Habeeb
    • February 2023
    • Faculty Research

    Success Academy Charter Schools

    By: Robin Greenwood, Joshua Coval and Denise Han
    • 2022
    • Faculty Research

    Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads

    By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
More from the Authors
  • Success Academy Charter Schools By: Robin Greenwood, Joshua D. Coval, Denise Han, Ruth Page and Dave Habeeb
  • Success Academy Charter Schools By: Robin Greenwood, Joshua Coval and Denise Han
  • Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College