There is a fascinating report on the Dow Jones newswire this AM detailing a paper presented by Harvard University historian, Niall Ferguson at the European Central Bank's inaugural forum in Sintra, Portugal.
The gist of the story :
The authors ( Ferguson, Moritz Schularick and Andreas Schaab) traced the history of central bank balance sheet expansion and contractions of "12 advanced economies since 1900".
"The size of central bank balance sheets has fluctuated between 10% and 20% of GDP most of the time except during WWII and the most recent crisis, which 'has eclipsed all other historical precedents.'"
The authors detail the finding that in the three decades prior to the credit crisis, central bank balance sheets had shrunk significantly when 'measured as a percentage of GDP'.
"By that yardstick, their (recent) expansion merely marks a return to earlier levels".
The authors state that central bank balance sheets had "become small relative to the financial sector".
Here is a key part of the study:
"Central banks rarely reduce their balance sheets by selling securities; instead they shrink as a share of GDP because the economy expands".
In their own words:
"We have not recorded a single incident in which a central bank has primarily sold long-term government ( or private market) securities to unwind a long expansion in nominal terms".
The authors also note:
"there is little historical evidence that large central bank balance sheets pose ' an imminent risk to price stability'.
Here is another key quote from the story:
"Over time, the size of central bank balance sheets closely tracks the size of the public debt. But there is an important caveat: the lesson of the 1950s is that once a central bank has been buying bonds to keep long-term interest rates low, it can confront political pressures when it tries to reverse course".
Here is a link to the story:
http://blogs.wsj.com/economics/
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