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I'm reading a book on macroeconomics, and on a chapter on the money market, when explaining how the central banks(CB) determine the interest rate, there is a balance sheet for the CB. In it, under the assets we have bonds, and under liabilities we have currency and bank reserves. My question is which bonds are these? Do these bonds belong to the same country that the CB belongs to? Isn't in this case the bond of the CB a liability/debt that will have to be repaid in the future? Because if so, it seems that we're just exchanging one liability (bond) for another (money).

Or are these bonds from any entities other than the CB itself?

Any help would be appreciated.

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My question is which bonds are these? Do these bonds belong to the same country that the CB belongs to?

This will vary a lot from central bank to central bank. Most of the assets of the US Federal Reserve are indeed government securities, but the European Central Bank is prohibited from buying such securities (because of the crisis, it now buys limited amounts of them, but the legal grounds are shaky).

Since 2009, central bank balance sheets have changed quite a bit. In 2008 the Federal Reserve did not hold any mortgage backed securities. Now, they comprise about 40% of the Fed's total assets.

Take a look at the Fed's balance sheet in Table 1 of the August 2015 report.

Because if so, it seems that we're just exchanging one liability (bond) for another (money). Or are these bonds from any entities other than the CB itself?

Yes, they are from other entities. For example, US Treasury bonds are about half of the Fed's balance sheet. These bonds are issued by the Department of the Treasury and must be pay back to the Fed on maturity, using money collected from taxes or the proceeds from new bond issues.

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  • $\begingroup$ And what happens if the bonds are denominated in foreign currency? How do they buy them? emit money, using the exchange rate, and then buy the bond? $\endgroup$ – An old man in the sea. Aug 25 '15 at 23:33
  • $\begingroup$ @Anoldmaninthesea. that is one way of doing it. It's called a non-sterilized intervention because it changes the size of the balance sheet. Another way would be for the CB to sell assets instead of issuing new currency. In that case, the size of the balance sheet doesn't change and it is called a sterilized intervention. See en.wikipedia.org/wiki/… $\endgroup$ – suriv Aug 26 '15 at 9:59

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