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The role of central bank capital revisited

Author

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  • Bindseil, Ulrich
  • Manzanares, Andrés
  • Weller, Benedict

Abstract

This paper explores the role of central bank capital in ensuring that central banks focus on price stability in monetary policy decisions. The paper goes beyond the existing literature on this topic by developing a simple, but comprehensive, model of the relationship between a central bank's balance sheet structure and its inflation performance. The first part of the paper looks at solvency, i.e. under which conditions the "economic" capital (i.e. the discounted long term P&L) of a central bank always remains positive, despite adverse shocks, assuming a stability oriented monetary policy. The second part shows that in practice, capital is important for central banks beyond the issue of positive economic capital, when taking realistic assumptions regarding central bank independence. Capital thus remains a key tool to ensure that central banks are unconstrained in their focus on price stability in monetary policy decisions. JEL Classification: E42, E58

Suggested Citation

  • Bindseil, Ulrich & Manzanares, Andrés & Weller, Benedict, 2004. "The role of central bank capital revisited," Working Paper Series 392, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2004392
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    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp392.pdf
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    Citations

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    Cited by:

    1. Schobert, Franziska, 2006. "Linking financial soundness and independence of central banks--Central and Eastern Europe, Turkey and CIS countries," Research in International Business and Finance, Elsevier, vol. 20(2), pages 239-255, June.
    2. repec:eee:jbfina:v:83:y:2017:i:c:p:232-248 is not listed on IDEAS
    3. Bholat, David & Darbyshire, Robin, 2016. "Accounting in central banks," Bank of England working papers 604, Bank of England.
    4. Bank for International Settlements, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, number 71.
    5. Sona Benecka & Tomas Holub & Narcisa Liliana Kadlcakova & Ivana Kubicova, 2012. "Does Central Bank Financial Strength Matter for Inflation? An Empirical Analysis," Working Papers 2012/03, Czech National Bank, Research Department.
    6. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    7. Luis Felipe Céspedes C. & Rodrigo Valdés P., 2006. "Central Bank Autonomy: The Chilean Experience," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(1), pages 25-47, April.
    8. Schwarz Claudia & Karakitsos Polychronis & Merriman Niall & Studener Werner, 2015. "Why Accounting Matters: A Central Bank Perspective," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 5(1), pages 1-42, March.
    9. repec:wsi:jicepx:v:04:y:2013:i:02:n:s1793993313500117 is not listed on IDEAS
    10. Garreth Rule, 2015. "Understanding the central bank balance sheet," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 32, March.
    11. Perera, Anil & Ralston, Deborah & Wickramanayake, Jayasinghe, 2013. "Central bank financial strength and inflation: Is there a robust link?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 399-414.
    12. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Norwegian School of Economics, Department of Business and Management Science.
    13. Winkler, Adalbert & Bindseil, Ulrich, 2012. "Dual liquidity crises under alternative monetary frameworks," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62032, Verein für Socialpolitik / German Economic Association.
    14. Jörg Bibow, 2015. "The euro's savior? Assessing the ECB's crisis management performance and potential for crisis resolution," IMK Studies 42-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. 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, University of Economics, Prague, vol. 2010(6), pages 723-746.
    16. Bernard J Laurens & Marco Arnone & Jean-François Segalotto, 2006. "The Measurement of Central Bank Autonomy; Survey of Models, Indicators, and Empirical Evidence," IMF Working Papers 06/227, International Monetary Fund.
    17. 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.
    18. repec:bla:reviec:v:25:y:2017:i:5:p:990-998 is not listed on IDEAS
    19. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    20. de Grauwe, Paul, 2016. "The legacy of the Eurozone crisis and how to overcome it," LSE Research Online Documents on Economics 65539, London School of Economics and Political Science, LSE Library.
    21. Luis Felipe Céspedes & Rodrigo Valdés, 2006. "Autonomía de Bancos Centrales: La Experiencia Chilena," Working Papers Central Bank of Chile 358, Central Bank of Chile.
    22. André Grjebine, 2013. "L'Eurosystème: un mécanisme de transferts en faveur des pays déficitaires ? Le débat," Post-Print hal-01024818, HAL.
    23. 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.
    24. Jorg Bibow, 2015. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution," Economics Working Paper Archive wp_845, Levy Economics Institute.

    More about this item

    Keywords

    Central bank capital; central bank independence;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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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