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Capitalizing Central Banks

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  • Alain Ize
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    Abstract

    This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank''s operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/15.

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    Length: 25
    Date of creation: 01 Jan 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/15

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    References

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    1. Joshua Aizenman & Nancy P. Marion, 2002. "The high demand for international reserves in the Far East: what's going on?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    2. Pablo García & Claudio Soto, 2006. "Large Hoardings of International Reserves: Are They Worth It?," Central Banking, Analysis, and Economic Policies Book Series, in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 6, pages 171-206 Central Bank of Chile.
    3. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
    4. J.Ramon Martinez-Resano, 2004. "Central bank Financial Independence," Macroeconomics 0403011, EconWPA.
    5. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
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    Citations

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    Cited by:
    1. Marcel Peter & Scott Roger & Geoffrey Heenan, 2006. "Implementing Inflation Targeting," IMF Working Papers 06/278, International Monetary Fund.
    2. Batini, Nicoletta & Levine, Paul & Pearlman, Joseph, 2009. "Estabilización óptima del tipo de cambio en una economía dolarizada con meta inflacionaria," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 16, pages 37-82.
    3. 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.
    4. 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.
    5. Ansgar Belke & Niklas Potrafke, 2011. "Does Government Ideology Matter in Monetary Policy? A Panel Data Analysis for OECD Countries," Working Paper Series of the Department of Economics, University of Konstanz 2011-48, Department of Economics, University of Konstanz.
    6. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
    7. Alain Ize, 2006. "Spending Seigniorage," IMF Working Papers 06/58, International Monetary Fund.
    8. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta.
    9. Bank for International Settlements, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, number 71, May.
    10. Ljungwall, Christer & Xiong, Yi & Yutong, Zou, 2013. "Central bank financial strength and the cost of sterilization in China," China Economic Review, Elsevier, vol. 25(C), pages 105-116.
    11. Martin Cincibuch & Tomas Holub & Jaromir Hurnik, 2008. "Central Bank Losses and Economic Convergence," Working Papers 2008/3, Czech National Bank, Research Department.
    12. Thomas F. Cargill, 2006. "Central bank capital, financial strength, and the Bank of Japan," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may19.
    13. Nada Oulidi & Alain Ize, 2009. "Why Do Central Banks Go Weak?," IMF Working Papers 09/13, International Monetary Fund.
    14. Ljungwall, Christer & Xiong, Yi & Zou, Yutong, 2009. "Central Bank Financial Strength And The Cost Of Sterilization In China," Working Paper Series 2009-8, China Economic Research Center, Stockholm School of Economics.
    15. Jorge E. Restrepo L. & Luis Salomó S. & Rodrigo O. Valdés P., 2009. "Macroeconomy, Monetary Policy and Central Bank Capitalization," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(1), pages 5-38, April.
    16. Eduardo Levy Yeyati & Alain Ize & Miguel A. Kiguel, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economies," IMF Working Papers 05/188, International Monetary Fund.
    17. Alain Ize & Miguel Kiguel & Eduardo Levy Yeyati, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economy," Business School Working Papers managsystrisk, Universidad Torcuato Di Tella.
    18. Osama Sweidan, 2010. "Central bank inability and Taylor rule in developing countries," International Review of Economics, Springer, vol. 57(4), pages 395-409, December.
    19. Peter Stella & Ulrich H. Klueh, 2008. "Central Bank Financial Strength and Policy Performance," IMF Working Papers 08/176, International Monetary Fund.
    20. Bernard Laurens & Marco Arnone & Jean-François Segalotto, 2006. "The Measurement of Central Bank Autonomy," IMF Working Papers 06/227, International Monetary Fund.

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