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Central Bank Losses and Economic Convergence

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Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:fau:fauart:v:59:y:2009:i:3:p:190-215
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    Cited by:

    1. christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," BIS Working Papers 559, Bank for International Settlements.
    2. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819, February.
    3. Atsushi Tanaka, 2021. "Central Bank Capital and Credibility: A Literature Survey," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(2), pages 249-262, June.
    4. David Archer & Paul Moser-Boehm, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, number 71.
    5. repec:cnb:ocpubv:rb09/2 is not listed on IDEAS
    6. Pornpinun Chantapacdepong & Nuttathum Chutasripanich & Bovonvich Jindarak, 2012. "Central Bank Balance Sheet and Policy Implications," Working Papers 2012-07, Monetary Policy Group, Bank of Thailand.
    7. Jan Cimburek & Pavel Řežábek, 2008. "Hotovost v oběhu: světové trendy a situace v České republice [Currency in circulation: global trends and the situation in the Czech republic]," Politická ekonomie, Prague University of Economics and Business, vol. 2008(6), pages 739-758.
    8. Lubomír Lízal & Jirí Schwarz, 2013. "Foreign exchange interventions as an (un)conventional monetary policy tool," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 127-143, Bank for International Settlements.
    9. Osama Sweidan, 2010. "Central bank inability and Taylor rule in developing countries," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 57(4), pages 395-409, December.
    10. repec:cnb:ocpubv:rb10/1 is not listed on IDEAS
    11. Karel Brůna, 2010. "Akumulace devizových rezerv centrálních bank a dynamika absorpce likvidity bankovních systémů České republiky, Polska a Maďarska [Central Bank´s Foreign Exchange Reserves Accumulation and Dynamics ," Politická ekonomie, Prague University of Economics and Business, vol. 2010(6), pages 723-746.
    12. Andreas Hoffmann & Axel Loeffler, 2017. "Surplus liquidity, central bank losses and the use of reserve requirements in emerging markets," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 990-998, November.
    13. Michal Franta & Tomas Holub & Branislav Saxa, 2018. "Balance Sheet Implications of the Czech National Bank's Exchange Rate Commitment," Working Papers 2018/10, Czech National Bank.
    14. Christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," DNB Working Papers 510, Netherlands Central Bank, Research Department.
    15. Atsushi Tanaka, 2020. "Central Bank Capital and Credibility: A Literature Survey," Discussion Paper Series 208, School of Economics, Kwansei Gakuin University, revised May 2020.
    16. 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.

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    More about this item

    Keywords

    balance sheet; central bank; economic convergence; monetary policy; real appreciation; risk premium; seigniorage; transition;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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