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Central bank independence and risk-taking at the zero lower bound

Author

Listed:
  • Bartels, Bernhard
  • Eichengreen, Barry
  • Schumacher, Julian
  • Weder di Mauro, Beatrice

Abstract

Unprecedented balance sheet expansion in recent years has resulted in heightened financial risk for central banks, reflected initially in higher profits and subsequently in significant losses. Combining data on central bank balance sheets with market data on asset prices, we provide evidence on the evolution and determinants of financial risk-taking by 18 advanced economy central banks. Based on the estimated Value at Risk (VaR), we document that average central bank balance sheet risk increased to about 3 percent of GDP. Central banks took more risk in periods of low policy rates, less expansionary fiscal policies, and more favorable growth prospects. Less independent central banks were more risk averse than their more independent peers, contrary to the fiscal dominance view. JEL Classification: E52, E58, E63, G32

Suggested Citation

  • Bartels, Bernhard & Eichengreen, Barry & Schumacher, Julian & Weder di Mauro, Beatrice, 2025. "Central bank independence and risk-taking at the zero lower bound," Working Paper Series 3079, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253079
    Note: 2604030
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    Keywords

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    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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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