Central Banks and the Absorption of International Shocks (1890—2021)

Talk by Matthias Morys (York) as part of the Research Seminar Series of the IOS Economics Department.

Countries wish to reap the benefits of financial integration while shielding themselves from the vagaries of international financial markets. But can they have it both ways? This paper studies the respective roles of exchange rates, capital controls and central bank balance sheets to tame the effects of international financial shocks over the last 130 years, across very different monetary regimes. Our main contribution is to show that central banks have consistently used their balance sheet to mitigate the impact of an international financial shock on domestic financial markets; and not only since the Global Financial Crisis of 2008 and the discussion on balance sheet policies which it sparked. Their international portfolio (foreign reserves) limits the effects of the shock on the exchange rate while the domestic portfolio (loans & open market operations) stabilizes the money market. We rely on new collected weekly and monthly data of central bank balance sheets for 22 countries worldwide which can be traced back to the 1890s.