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Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model

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  • Atsushi Tanaka

    (School of Economics, Kwansei Gakuin University)

Abstract

In 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.

Suggested Citation

  • 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.
    • Handle: RePEc:kgu:wpaper:102
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    References listed on IDEAS

    as
    1. Mr. Peter Stella & Mr. Ulrich H Klueh, 2008. "Central Bank Financial Strength and Policy Performance: An Econometric Evaluation," IMF Working Papers 2008/176, International Monetary Fund.
    2. Mr. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Working Papers 2005/015, International Monetary Fund.
    3. Martin Cincibuch & Tomáš Holub & Jaromír Hurník, 2009. "Central Bank Losses and Economic Convergence," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(3), pages 190-215, August.
    4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    5. Gustavo Adler & Pedro Castro & Camilo Tovar, 2016. "Does Central Bank Capital Matter for Monetary Policy?," Open Economies Review, Springer, vol. 27(1), pages 183-205, February.
    6. Bindseil, Ulrich & Manzanares, Andrés & Weller, Benedict, 2004. "The role of central bank capital revisited," Working Paper Series 392, European Central Bank.
    7. Mr. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 1997/083, International Monetary Fund.
    8. Berriel Tiago C & Bhattarai Saroj, 2009. "Monetary Policy and Central Bank Balance Sheet Concerns," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-33, January.
    9. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    central bank; capital; financial strength; credibility; monetary policy;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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