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Central Bank Financial Strength and Policy Performance

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Author Info

  • Peter Stella
  • Ulrich H. Klueh

Abstract

The financial health of central banks and its relation to policy outcomes has recently been recognized as an important policy issue. While case study evidence clearly indicates that weak central bank finances can hamper effective policy implementation, the question of whether central bank financial strength influences policy performance remains controversial. This is due, in part, to a lack of econometric evidence. The paper presents a first step toward filling this gap, by providing a quantitative evaluation of the relationship between measures of central bank financial strength and policy performance, in particular inflation. The paper''s major finding is that there indeed is a negative relationship between central bank financial strength and inflation outcomes. This relationship appears to be robust to the choice of alternative country samples, control variables, estimation strategies, and conceptualizations of central bank financial strength.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/176.

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Length: 45
Date of creation: 01 Jul 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/176

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Related research

Keywords: Central bank autonomy; Economic indicators; central bank; inflation; central banks; monetary fund; monetary policy; monetary authorities; debt market; reserve requirements; debt management; reserve accumulation; monetary economics; domestic debt market; domestic debt; money demand; monetary policies; monetary policy decisions; intermediate monetary target; monetary institutions; debt accumulation; reserve holdings; monetary authority; reserve bank; monetary policy operations; public debt; external shock; monetary integration; market for government securities; monetary target; domestic public debt; long-term debt; domestic debt market development; money market; minimum reserve requirements; expansionary monetary policy; government securities;

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References

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  1. Sturm, Jan-Egbert & Haan, Jakob de, 2001. "Inflation in developing countries: does Central Bank independence matter?," CCSO Working Papers 200101, University of Groningen, CCSO Centre for Economic Research.
  2. Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.
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  4. Peter Stella, 2008. "Central Bank Financial Strength, Policy Constraints and Inflation," IMF Working Papers 08/49, International Monetary Fund.
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  6. John Hawkins, 2003. "Central bank balance sheets and fiscal operations," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal issues and central banking in emerging economies, volume 20, pages 71-83 Bank for International Settlements.
  7. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
  8. Luis Ignacio Jácome & Francisco F. Vázquez, 2005. "Any Link Between Legal Central Bank Independence and Inflation? Evidence From Latin America and the Caribbean," IMF Working Papers 05/75, International Monetary Fund.
  9. Jean-François Segalotto & Marco Arnone & Bernard Laurens, 2006. "Measures of Central Bank Autonomy," IMF Working Papers 06/228, International Monetary Fund.
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  14. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
  15. Frisell, Lars & Roszbach, Kasper & spagnolo, giancarlo, 2008. "Governing the Governors: A Clinical Study of Central Banks," Working Paper Series 221, Sveriges Riksbank (Central Bank of Sweden).
  16. Alain Ize, 2005. "Capitalizing Central Banks," IMF Working Papers 05/15, International Monetary Fund.
  17. Alfaro, Laura, 2005. "Inflation, openness, and exchange-rate regimes: The quest for short-term commitment," Journal of Development Economics, Elsevier, vol. 77(1), pages 229-249, June.
  18. Claudia Helene Dziobek & John W. Dalton, 2005. "Central Bank Losses and Experiences in Selected Countries," IMF Working Papers 05/72, International Monetary Fund.
  19. Thomas F. Cargill, 2005. "Is the Bank of Japan's Financial Structure an Obstacle to Policy?," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 311-334, September.
  20. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  21. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
  22. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta.
  23. Bernard Laurens & Marco Arnone & Jean-François Segalotto, 2006. "The Measurement of Central Bank Autonomy," IMF Working Papers 06/227, International Monetary Fund.
  24. Fry, Maxwell J, 1998. "Assessing Central Bank Independence in Developing Countries: Do Actions Speak Louder Than Words?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 512-29, July.
  25. repec:imf:imfpdp:9314 is not listed on IDEAS
  26. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ramon Moreno, 2011. "Foreign exchange market intervention in EMEs: implications for central banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 65-86 Bank for International Settlements.
  2. Belke, Ansgar & Potrafke, Niklas, 2012. "Does government ideology matter in monetary policy? A panel data analysis for OECD countries," Munich Reprints in Economics 20245, University of Munich, Department of Economics.
  3. Tatom, John, 2011. "Monetary policy in disarray," MPRA Paper 34607, University Library of Munich, Germany.
  4. Osama Sweidan, 2010. "Central bank inability and Taylor rule in developing countries," International Review of Economics, Springer, vol. 57(4), pages 395-409, December.
  5. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta.
  6. Nada Oulidi & Alain Ize, 2009. "Why Do Central Banks Go Weak?," IMF Working Papers 09/13, International Monetary Fund.
  7. 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.
  8. Peter Howells, 2009. "Independent Central Banks: Some theoretical and empirical problems?," Working Papers 0908, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  9. 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.

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