Balance Sheet Policy Above the ELB

When the short rate is above the effective lower bound, a central bank does not need a large balance sheet to steer the economy. I discuss factors relevant for setting balance sheet size and composition above the ELB, focusing on the role of convenience yields. Reserves provide a liquid and safe asset suggesting that a central bank may want to supply enough to set their convenience yield of zero. However, if reserves are supplied via purchases of bonds (e.g., Treasuries or Bunds) which themselves have convenience yields, the convenience-maximizing central bank balance sheet size equalizes the convenience yields on reserves and bonds and is smaller than the former prescription would imply. I estimate the convenience-maximizing balance sheet size for the US and the euro area, emphasizing different political constraints across the Atlantic on which types of assets central banks can hold without being perceived as affecting credit allocation or fiscal policy. I clarify the difference between convenience-maximization and maximizing seigniorage from convenience yields.