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Central Bank Losses and Economic Convergence

This paper discusses central bank losses and develops a formal framework for assessing the sustainability of its balance sheet. Analyzing the consequences of economic convergence in depth, it emphasizes the role played by the risk premium and equilibrium real exchange rate appreciation. A closed-form comparative-static analysis and also numerical solutions of the future evolution of the central bank’s own capital are presented. Applying this framework to an example of a converging economy, namely the Czech Republic, the authors find that the Czech National Bank should be able to repay its accumulated loss in about 15 years without any transfer from public budgets.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 59 (2009)
Issue (Month): 3 (August)
Pages: 190-215

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Handle: RePEc:fau:fauart:v:59:y:2009:i:3:p:190-215
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  1. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
  2. Alain Ize, 2005. "Capitalizing Central Banks: A Net Worth Approach," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 289-310, September.
  3. Matthew Higgins & Thomas Klitgaard, 2004. "Reserve accumulation: implications for global capital flows and financial markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Sep).
  4. Hans-Werner Sinn & Holger Feist, 1997. "Eurowinners and Eurolosers: The Distribution of Seigniorage Wealth in EMU," NBER Working Papers 6072, National Bureau of Economic Research, Inc.
  5. Sinn, Hans-Werner & Feist, Holger, 1997. "Eurowinners and Eurolosers: The distribution of seigniorage wealth in EMU1," European Journal of Political Economy, Elsevier, vol. 13(4), pages 665-689, December.
  6. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta.
  7. Tomáš Holub, 2001. "Seignorage and Central Bank Finance," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 51(1), pages 9-32, January.
  8. Daniel Gros, 2004. "Profiting from the Euro? Seigniorage Gains from Euro Area Accession," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 795-813, November.
  9. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 97/83, International Monetary Fund.
  10. Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.
  11. Bindseil, Ulrich & Manzanares, Andrés & Weller, Benedict, 2004. "The role of central bank capital revisited," Working Paper Series 0392, European Central Bank.
  12. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
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