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The role of central bank capital revisited

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  • Bindseil, Ulrich
  • Manzanares, Andrés
  • Weller, Benedict
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    Abstract

    This paper explores the role of central bank capital in ensuring that central banks focus on price stability in monetary policy decisions. The paper goes beyond the existing literature on this topic by developing a simple, but comprehensive, model of the relationship between a central bank's balance sheet structure and its inflation performance. The first part of the paper looks at solvency, i.e. under which conditions the "economic" capital (i.e. the discounted long term P&L) of a central bank always remains positive, despite adverse shocks, assuming a stability oriented monetary policy. The second part shows that in practice, capital is important for central banks beyond the issue of positive economic capital, when taking realistic assumptions regarding central bank independence. Capital thus remains a key tool to ensure that central banks are unconstrained in their focus on price stability in monetary policy decisions. JEL Classification: E42, E58

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0392.

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    Date of creation: Sep 2004
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    Handle: RePEc:ecb:ecbwps:20040392

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    Keywords: Central bank capital; central bank independence;

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    Cited by:
    1. Luis Felipe Céspedes & Rodrigo Valdés, 2006. "Autonomía de Bancos Centrales: La Experiencia Chilena," Working Papers Central Bank of Chile 358, Central Bank of Chile.
    2. Martin Cincibuch & Tomas Holub & Jaromir Hurnik, 2008. "Central Bank Losses and Economic Convergence," Working Papers 2008/3, Czech National Bank, Research Department.
    3. Perera, Anil & Ralston, Deborah & Wickramanayake, Jayasinghe, 2013. "Central bank financial strength and inflation: Is there a robust link?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 399-414.
    4. Luis Felipe Céspedes C. & Rodrigo Valdés P., 2006. "Central Bank Autonomy: The Chilean Experience," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(1), pages 25-47, April.
    5. Bernard Laurens & Marco Arnone & Jean-François Segalotto, 2006. "The Measurement of Central Bank Autonomy," IMF Working Papers 06/227, International Monetary Fund.
    6. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Department of Business and Management Science, Norwegian School of Economics.

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