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Central Bank Losses and Inflation: 350 Years of Evidence

Author

Listed:
  • Grodecka-Messi, Anna

    (Financial Stability Department, Central Bank of Sweden)

  • Kliem, Martin

    (Deutsche Bundesbank)

  • Muller, Gernot J.

    (University of Tübingen, CEPR and CESifo)

Abstract

Are central bank losses inflationary? We address this question at two levels. First, we revisit the theory and show that central bank losses constrain the conduct of monetary policy and are indeed inflationary provided the central bank is (a) not automatically recapitalized by the government and (b) concerned about its net worth. Second, we collect 350 years of data on the world’s oldest central bank, the Sveriges Riksbank. We construct a time series for its return on assets and a narrative measure of profitability shocks. We find that inflation increases strongly and persistently in response to exogenous declines in central bank profits.

Suggested Citation

  • Grodecka-Messi, Anna & Kliem, Martin & Muller, Gernot J., 2025. "Central Bank Losses and Inflation: 350 Years of Evidence," Working Paper Series 457, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0457
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    References listed on IDEAS

    as
    1. Mr. Peter Stella & Mr. Ulrich H Klueh, 2008. "Central Bank Financial Strength and Policy Performance: An Econometric Evaluation," IMF Working Papers 2008/176, International Monetary Fund.
    2. 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 and Statistics Department.
    3. Nergiz Dincer & Barry Eichengreen & Joan J. Martinez, 2024. "Central Bank Independence: Views from History and Machine Learning," Annual Review of Economics, Annual Reviews, vol. 16(1), pages 393-428, August.
    4. Théodore Humann & Kris James Mitchener & Eric Monnet, 2025. "Do disinflation policies ravage central bank finances?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 40(122), pages 341-370.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    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
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-

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