From independence to interdependence: The global connectedness of central banks’ balance sheet total assets

Abstract

This study examines the global spillover effects of central banks’ balance sheet expansions on a weekly basis from 2006 to 2023, using a quantile VAR framework and dynamic connectedness analysis across five major central banks [Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE), Bank of Canada (BoC), and Bank of Australia (RBA)], the relevant ten-year sovereign bonds, and the VIX index. The analysis reveals a pronounced U-shaped pattern in systemic connectedness, with highest spillovers during extreme market conditions (low and high quantiles) and lower connectedness in normal periods. Ten-year sovereign bonds emerge as the primary contributors of forecast error variance across all regimes, while central banks—particularly the Fed and BoE—act as net absorbers of spillovers especially during crisis periods. The tails show the most monetary policy synchrony, suggesting globally intertwined reactions under stress and idiosyncratic actions under calm. Structural break and heatmap analyses across the Global Financial Crisis (GFC), Eurozone crisis, and COVID-19 confirm the latter. These findings underscore the need for policymakers to consider cross-border transmission effects and rethink the presumed domestic containment of unconventional monetary policy tools.