Central Bank Losses and Inflation: 350 Years of Evidence

Are central bank losses inflationary? We show in a simple model that, absent fiscal support, large losses can create a trade-off between stabilizing inflation and stabilizing central bank net worth. We then provide evidence that central bank net worth matters for monetary policy in practice, drawing on a new historical data set with more than 350 years of annual data for Sweden and its central bank, the Riksbank. Using a narrative approach, we identify large adverse shocks to the Riksbank's profitability and trace their dynamic effects. They raise inflation persistently under fiat but not under metallic standards. Moreover, adverse import-price shocks generate more inflation and a more accommodative monetary response when central bank net worth is low. This historical evidence therefore bears directly on current debates over the monetary-policy consequences of large and risky central-bank balance sheets.