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Central Bank Vulnerability and the Credibility of Commitments

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  • Liliana Schumacher
  • Mario I. Bléjer
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    Abstract

    A loss of solvency increases central bank vulnerability, reducing the credibility of commitments to defend a nominal regime, including an exchange rate peg. This paper develops a methodology to assess central bank solvency and exposure to risk. The measure, based on Value-at-Risk, is frequently used to evaluate commercial risk. The paper emphasizes that the ability to sustain nominal commitments cannot be gauged by focusing only on selected accounts (such as reserves), but requires a comprehensive solvency and vulnerability analysis of the monetary authorities’ complete portfolio (including off-balance-sheet operations). The suggested measure has powerful reporting value and its disclosure could improve monitoring of sovereign solvency risk.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/65.

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    Length: 29
    Date of creation: 01 May 1998
    Date of revision:
    Handle: RePEc:imf:imfwpa:98/65

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    Cited by:
    1. Peter Stella, 2002. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Working Papers 02/137, International Monetary Fund.
    2. González, M. & Minguez, R., 2005. "The Method Of Simulated Maximum Likelihood For The Estimaton Of Dynamic Ordered Probit: An Application To Country-Risk For Non-Developed Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 2(3), pages 99-133.
    3. Christoffersen, Peter & Errunza, Vihang, 2000. "Towards a global financial architecture: capital mobility and risk management issues," Emerging Markets Review, Elsevier, Elsevier, vol. 1(1), pages 3-20, May.
    4. Frederico Pechir Gomes & Marcelo Yoshio Takami & Vinicius Ratton Brandi, 2008. "Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate," Working Papers Series, Central Bank of Brazil, Research Department 174, Central Bank of Brazil, Research Department.

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