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Central Bank Financial Strength and Policy Performance; An Econometric Evaluation

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  • Peter Stella
  • Ulrich H Klueh

Abstract

The financial health of central banks and its relation to policy outcomes has recently been recognized as an important policy issue. While case study evidence clearly indicates that weak central bank finances can hamper effective policy implementation, the question of whether central bank financial strength influences policy performance remains controversial. This is due, in part, to a lack of econometric evidence. The paper presents a first step toward filling this gap, by providing a quantitative evaluation of the relationship between measures of central bank financial strength and policy performance, in particular inflation. The paper's major finding is that there indeed is a negative relationship between central bank financial strength and inflation outcomes. This relationship appears to be robust to the choice of alternative country samples, control variables, estimation strategies, and conceptualizations of central bank financial strength.

Suggested Citation

  • Peter Stella & Ulrich H Klueh, 2008. "Central Bank Financial Strength and Policy Performance; An Econometric Evaluation," IMF Working Papers 08/176, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/176
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    Cited by:

    1. Michele Cavallo & Marco Del Negro & W. Scott Frame & Jamie Grasing & Benjamin A. Malin & Carlo Rosa, 2018. "Fiscal Implications of the Federal Reserve's Balance Sheet Normalization," Finance and Economics Discussion Series 2018-002, Board of Governors of the Federal Reserve System (U.S.).
    2. Ramon Moreno, 2011. "Foreign exchange market intervention in EMEs: implications for central banks," BIS Papers chapters,in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 65-86 Bank for International Settlements.
    3. Seth Carpenter & Jane Ihrig & Elizabeth Klee & Daniel Quinn & Alexander Boote, 2015. "The Federal Reserve's Balance Sheet and Earnings: A Primer and Projections," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 237-283, March.
    4. Bartels, Bernhard & Eichengreen, Barry & Weder, Beatrice, 2016. "No Smoking Gun: Private Shareholders, Governance Rules and Central Bank Financial Behavior," CEPR Discussion Papers 11625, C.E.P.R. Discussion Papers.
    5. Bholat, David & Darbyshire, Robin, 2016. "Accounting in central banks," Bank of England working papers 604, Bank of England.
    6. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.
    7. Stephen Quinn & William Roberds, 2016. "Death of a Reserve Currency," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 63-103, December.
    8. Julien Pinter, 2017. "Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support," Documents de travail du Centre d'Economie de la Sorbonne 17055, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    9. Igor Goncharov & Vasso Ioannidou & Martin C. Schmalz, 2017. "(Why) Do Central Banks Care About Their Profits?," CESifo Working Paper Series 6546, CESifo Group Munich.
    10. 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.
    11. Peter Howells, 2009. "Independent Central Banks: Some theoretical and empirical problems?," Working Papers 0908, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    12. Klose, Jens, 2016. "Determinants of Eurosystems Central Banks Provisions," Annual Conference 2016 (Augsburg): Demographic Change 145508, Verein für Socialpolitik / German Economic Association.
    13. Osama Sweidan, 2010. "Central bank inability and Taylor rule in developing countries," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 57(4), pages 395-409, December.
    14. 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.
    15. Chan-Guk Huh & Jie Wu, 2015. "Linkage between US monetary policy and emerging economies: the case of Korea?s financial market and monetary policy," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 4(3), pages 1-18, September.
    16. Jorge E. Restrepo L. & Luis Salomó S. & Rodrigo O. Valdés P., 2009. "Macroeconomy, Monetary Policy and Central Bank Capitalization," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(1), pages 5-38, April.
    17. repec:bla:reviec:v:25:y:2017:i:5:p:990-998 is not listed on IDEAS
    18. Chan-Guk Huh, 2015. "Normalization of unconventional US monetary policy and its implications: Korea?s monetary policy case," Proceedings of International Academic Conferences 2504115, International Institute of Social and Economic Sciences.
    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, November.
    20. Tatom, John, 2011. "Monetary policy in disarray," MPRA Paper 34607, University Library of Munich, Germany.
    21. Nada Oulidi & Alain Ize, 2009. "Why Do Central Banks Go Weak?," IMF Working Papers 09/13, International Monetary Fund.
    22. 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.
    23. Cavallo, Michele & Del Negro, Marco & Frame, W. Scott & Grasing, Jamie & Malin, Benjamin A. & Rosa, Carlo, 2018. "Fiscal implications of the Federal Reserve's balance sheet normalization," Staff Reports 833, Federal Reserve Bank of New York.
    24. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," FRB Atlanta Working Paper 2008-13, Federal Reserve Bank of Atlanta.

    More about this item

    Keywords

    Central bank independence; Central bank capital; Central bank autonomy; Central banks; Economic indicators; Inflation; central bank; monetary fund; monetary policy;

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