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Central Bank Losses and Economic Convergence

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  • Martin Cincibuch
  • Tomas Holub
  • Jaromir Hurnik

Abstract

This paper discusses the issue of central bank losses, developing a framework for assessing the ability of a central bank to keep its balance sheet sustainable without having to default on its policy objectives. Compared to the earlier literature, it analyses in more depth the consequences of economic convergence for the evolution of the central bank’s balance sheet and the important role played in this process by the risk premium and equilibrium real exchange rate appreciation. A combination of a closed-form comparative-static analysis and numerical solutions of the future evolution of the central bank’s own capital is used. Applying the framework to the Czech National Bank’s case, the paper concludes that the CNB should be able to repay its accumulated loss in about 15 years without any transfer from public budgets.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2008/3.

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Date of creation: Oct 2008
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Handle: RePEc:cnb:wpaper:2008/3

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Keywords: Balance sheet; central bank; economic convergence; monetary policy; real appreciation; risk premium; seigniorage; transition.;

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References

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  1. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
  2. Daniel Gros, 2004. "Profiting from the Euro? Seigniorage Gains from Euro Area Accession," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 795-813, November.
  3. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
  4. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 97/83, International Monetary Fund.
  5. Sinn, Hans-Werner & Feist, Holger, 1997. "Eurowinners and Eurolosers: The distribution of seigniorage wealth in EMU1," European Journal of Political Economy, Elsevier, vol. 13(4), pages 665-689, December.
  6. Hans-Werner Sinn & Holger Feist, 1997. "Eurowinners and Eurolosers: The Distribution of Seigniorage Wealth in EMU," NBER Working Papers 6072, National Bureau of Economic Research, Inc.
  7. Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.
  8. Alain Ize, 2005. "Capitalizing Central Banks," IMF Working Papers 05/15, International Monetary Fund.
  9. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta.
  10. Tomáš Holub, 2001. "Seignorage and Central Bank Finance," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 51(1), pages 9-32, January.
  11. Bindseil, Ulrich & Manzanares, Andrés & Weller, Benedict, 2004. "The role of central bank capital revisited," Working Paper Series 0392, European Central Bank.
  12. Matthew Higgins & Thomas Klitgaard, 2004. "Reserve accumulation: implications for global capital flows and financial markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Sep).
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Citations

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Cited by:
  1. Jan Babecky & Alena Bicakova & Alexis Derviz & Tomas Havranek & Roman Horvath & Lubos Komarek & Zlatuse Komarkova & Jakub Mateju & Ke Pang & Renata Pasalicova & Zuzana Prelcova & Marie Rakova & Pierre, 2011. "Macro-Financial Linkages: Theory and Applications," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 9, number rb09/2 edited by Jan Babecky, August.
  2. Katerina Arnostova & Jozef Barunik & Jan Filacek & Michal Franta & David Havrlant & Roman Horvath & Filip Novotny & Marie Rakova & Lubos Ruzicka & Branislav Saxa & Katerina Smidkova & Peter Toth, 2012. "Macroeconomic Forecasting: Methods, Accuracy and Coordination," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 10, number rb10/1 edited by Jan Babecky, August.
  3. Osama Sweidan, 2010. "Central bank inability and Taylor rule in developing countries," International Review of Economics, Springer, vol. 57(4), pages 395-409, December.
  4. Bank for International Settlements, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, number 71, July.
  5. Atsushi Tanaka, 2013. "Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model," Discussion Paper Series 102, School of Economics, Kwansei Gakuin University, revised Mar 2013.
  6. Sona Benecka & Tomas Holub & Narcisa Liliana Kadlcakova & Ivana Kubicova, 2012. "Does Central Bank Financial Strength Matter for Inflation? An Empirical Analysis," Working Papers 2012/03, Czech National Bank, Research Department.
  7. Pornpinun Chantapacdepong & Nuttathum Chutasripanich & Bovonvich Jindarak, 2012. "Central Bank Balance Sheet and Policy Implications," Working Papers 2012-07, Economic Research Department, Bank of Thailand.
  8. Karel Brůna, 2010. "Central Bank´s Foreign Exchange Reserves Accumulation and Dynamics of Banking System Liquidity Absorption: The Case of the Czech Republic, Poland and Hungary," Politická ekonomie, University of Economics, Prague, vol. 2010(6), pages 723-746.

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