Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model
AbstractIn this paper, we develop a simple dynamic optimization model of a central bank, in which the bank’s profit affects its balance sheet. The model derives the transversality condition that is necessary for a central bank to be sustainable and to conduct an optimal monetary policy. In this sense, the transversality condition needs to be satisfied to maintain central bank credibility. We discuss some factors affecting the transversality condition and show that what is important to satisfy the condition and thus to maintain central bank credibility is not capital alone but the financial strength that generates no sustained loss.
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Bibliographic InfoPaper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 102.
Length: 17 pages
Date of creation: Mar 2013
Date of revision: Mar 2013
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More information through EDIRC
central bank; capital; financial strength; credibility; monetary policy;
Find related papers by JEL classification:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-06 (All new papers)
- NEP-CBA-2013-04-06 (Central Banking)
- NEP-DGE-2013-04-06 (Dynamic General Equilibrium)
- NEP-MAC-2013-04-06 (Macroeconomics)
- NEP-MON-2013-04-06 (Monetary Economics)
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.:
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