Central banks’ balance sheets have exploded in size since 2008. After interest rates started rising last year, several of those institutions have reported losses. That’s not a problem, we’re told, because central banks are not bound by ordinary accounting rules. Recent research, however, finds that financial crises are more likely to occur after periods when their balance sheets have expanded massively. Besides, losses erode both the credibility and independence of monetary authorities, making it harder for them to fulfil their inflation-fighting mandate.
In recent years, the typical central bank has combined the asset growth and asset-liability mismatches of
