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Does Central Bank Capital Matter for Monetary Policy?

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Author Info

  • Camilo Ernesto Tovar Mora
  • Pedro Castro
  • Gustavo Adler

Abstract

Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years?accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank''s net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/60.

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Length: 22
Date of creation: 01 Feb 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/60

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Related research

Keywords: Developed countries; Emerging markets; monetary policy; central bank; inflation; inflation targeting; monetary fund; monetary policy decisions; foreign exchange; money market; monetary policy rules; monetary regime; optimal monetary policy; foreign currency; monetary regimes; price stability; price inflation; inflation-targeting; monetary policies; macroeconomic stability; independent central bank; central bank monetary policy; monetary policy regime; inflation target; domestic monetary policy;

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References

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  1. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 155-186.
  2. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
  3. Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
  4. International Monetary Fund, 2011. "Foreign Exchange Intervention," IMF Working Papers 11/165, International Monetary Fund.
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Cited by:
  1. 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.
  2. Juan José Echavarría & Luis Fernando Melo & Santiago Téllez & Mauricio Villamizar, 2013. "The impact of pre-announced day-to-day interventions on the Colombian exchange rate," BIS Working Papers 428, Bank for International Settlements.
  3. Pornpinun Chantapacdepong & Nuttathum Chutasripanich & Bovonvich Jindarak, 2012. "Central Bank Balance Sheet and Policy Implications," Working Papers 2012-07, Economic Research Department, Bank of Thailand.
  4. Bank for International Settlements, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, number 71, July.
  5. 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.

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