Join us for this lecture in honour of LSE's Charles Goodhart which will be delivered by Raghuram Rajan.

When the Federal Reserve expanded its balance sheet via large-scale asset purchases (quantitative easing) in recent years, we find an increase in commercial bank deposits with a shortening of their maturity, and also an increase in outstanding bank lines of credit to corporations. However, when it halted the balance-sheet expansion in 2014 and even reversed it during quantitative tightening starting in 2017, there was no commensurate shrinkage of these claims on liquidity. Consequently, the past expansion of the Fed’s balance sheet left the financial sector more sensitive to potential liquidity shocks when the Fed started shrinking it, necessitating Fed liquidity provision in September 2019 and again in March 2020. If the past repeats, the shrinkage of the central bank balance sheet is not likely to be an entirely benign process and will require careful monitoring of the size of on- and off-balance-sheet demandable claims on the banking sector. It is reasonable to ask whether the prior expansion and then shrinkage of the central banks balance sheets had left the private financial sector more vulnerable to such disruptions, and as a result, dependent on further liquidity interventions.

Meet our speaker and chair

Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth. He was the 23rd Governor of the Reserve Bank of India between September 2013 and September 2016. Between 2003 and 2006, Dr. Rajan was the Chief Economist and Director of Research at the International Monetary Fund.

Nicholas Stern (@lordstern1) is IG Patel Professor of Economics and Government, Co-Director of the India Observatory and Chair of the Grantham Research Institute at the London School of Economics and Political Science.

More about this event

This event will be available to watch on LSE Live. LSE Live is the new home for our live streams, allowing you to tune in and join the global debate at LSE, wherever you are in the world. If you can't attend live, a video will be made available shortly afterwards on LSE's YouTube channel.

This is the second lecture in the PGIM Lecture Series in Honour of Charles Goodhart.

The PGIM Lecture Series in Honour of Charles Goodhart was set up in 2022 to honour Charles Goodhart, eminent economist and Emeritus Professor at LSE. Charles was instrumental in the founding of the Financial Markets Group more than 35 years ago. Charles Goodhart was appointed to the Norman Sosnow Chair of Banking and Finance at LSE in 1985, until his retirement in 2002 when he became Emeritus Professor of Banking and Finance. He was elected a Fellow of the British Academy in 1990, and awarded the CBE in 1997, for services to monetary economics. During 1986, he helped to establish the Financial Markets Group at LSE. For the previous 17 years he served as a monetary economist at the Bank of England, becoming a Chief Adviser in 1980. Following his advice on overcoming the financial crisis in Hong Kong in 1983, he subsequently served on the HK Exchange Fund Advisory Committee until 1997. The same year he was appointed one of the four independent outside members of the newly-formed Bank of England Monetary Policy Committee. He became an economic consultant to Morgan Stanley in 2009, until he resigned, at the age of 80, in 2016. Charles has written widely on matters relating to monetary policy, especially central banking, and macro-economics. He is the author of Goodhart's Law "that any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes".

The Financial Markets Group Research Centre (@FMG_LSE) was established in 1987 at the LSE. The FMG is a leading centre in Europe for policy research into financial markets. It is the focal point of LSE's research communication with the business, policy making and international finance communities. The FMG works alongside the Department of Finance to understand problems in financial markets and in the decision-making processes of corporations, banks and regulators.

This event forms part of LSE’s Understanding the UK Economy series, showcasing research and expertise on the state of the UK economy, its global context and its future.

Twitter Hashtag for this event: #LSEUKEconomy

Podcast & Video

A podcast of this event is available to download from Central Bank Balance Sheet Expansion and Financial Stability: why less can be more. 

A video of this event is available to watch at Central Bank Balance Sheet Expansion and Financial Stability: why less can be more. 

Podcasts and videos of many LSE events can be found at the LSE Public Lectures and Events: podcasts and videos channel.