Question about Central Bank Liquidity Swaps

[jlapienis]

Hello,

On the topic Study Notes: McGuire, US Dollar Shortage in Global Banking we are introduced to the Central Bank Liquidity Swaps and how the FED helped ECB to alleviate the shortage of USD on and after the GFC. There it says that the central banks can create any amount of money they need, but how this is done in practice by central banks? How do they create more currency? By issuing debt, expanding balance sheet? Doesn't this devalue the currency? What are the risks involved?

I know this can be done with securities as well. Central Banks can sustain liquidity for securities in crisis and i would to like to understand better how this is done.

Thanks!

 

[gsarm1987]

@jlapienis buying assets (aka quantitative easing) from open markets. it increases money supply. Printing also increase money supply, can cause inflation and result in devaluation of currency (too much paper chasing too few goods). Also when we talk of money supply, we cant ignore M1 (narrow money, cash short term deposits) and M2 (M1 + time deposits + money market funds and other savings deposits). So to control the risk of high inflation, banks increase the interest rates and when it comes to buying assets, may choose only certain good quality ones and ignore others.