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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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    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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