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Central Bank Financial Strength and Policy Performance: An Econometric Evaluation

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Author Info
Ulrich H. Klueh
Peter Stella

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

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Length: 45 pages
Date of creation: 18 Jul 2008
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Handle: RePEc:imf:imfwpa:08/176

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frisell, Lars & Roszbach, Kasper F. & Spagnolo, Giancarlo, 2008. "Governing the Governors: A Clinical Study of Central Banks," CEPR Discussion Papers 6888, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Luis Jácome & Francisco Vázquez, 2005. "Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean," Macroeconomics 0508011, EconWPA. [Downloadable!]
    Other versions:
  3. Ake Lonnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund. [Downloadable!]
  4. 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.
  5. Alain Ize, 2006. "Spending Seigniorage: Do Central Banks Have a Governance Problem?," IMF Working Papers 06/58, International Monetary Fund. [Downloadable!]
  6. Leone, Alfredo M, 1993. "Institutional and Operational Aspects of Central Bank Losses," IMF Papers on Policy Analysis and Assessments 93/14, International Monetary Fund.
  7. Marco Arena & Carmen Reinhart & Francisco Vázquez, 2006. "The Lending Channel in Emerging Economics: Are Foreign Banks Different?," NBER Working Papers 12340, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!]
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  10. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Working Papers 05/15, International Monetary Fund. [Downloadable!]
  11. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
  13. Jean-Francois Segalotto & Marco Arnone & Bernard Laurens, 2006. "The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence," IMF Working Papers 06/227, International Monetary Fund. [Downloadable!]
  14. Alfredo Mario Leone, 1993. "Institutional and Operational Aspects of Central Bank Losses," IMF Policy Discussion Papers 93/14, International Monetary Fund.
  15. Maxwell J. Fry, 1993. "The Fiscal Abuse of Central Banks," IMF Working Papers 93/58, International Monetary Fund.
  16. John W. Dalton & Claudia Helene Dziobek, 2005. "Central Bank Losses and Experiences in Selected Countries," IMF Working Papers 05/72, International Monetary Fund. [Downloadable!]
  17. Jean-Francois Segalotto & Marco Arnone & Bernard Laurens, 2006. "Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies," IMF Working Papers 06/228, International Monetary Fund. [Downloadable!]
  18. Gauti Eggertsson & Eric Le Borgne, 2005. "The politics of central bank independence: a theory of pandering and learning in government," Staff Reports 205, Federal Reserve Bank of New York. [Downloadable!]
  19. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November. [Downloadable!] (restricted)
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  20. Markiewicz, Malgorzata, 2001. "Quasi-fiscal operations of central banks in transition economies," BOFIT Discussion Papers 2/2001, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  21. 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. [Downloadable!]
  22. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nada Oulidi & Alain Ize, 2009. "Why Do Central Banks Go Weak?," IMF Working Papers 09/13, International Monetary Fund. [Downloadable!]
  2. Peter Howells, 2009. "Independent Central Banks: Some theoretical and empirical problems?," Discussion Papers 0908, University of the West of England, Department of Economics. [Downloadable!]
  3. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta. [Downloadable!]
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