Does Central Bank Capital Matter for Monetary Policy?
Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years?accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank's net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels.
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- Todd E. Clark & Kenneth D. West, 2004.
"Using out-of-sample mean squared prediction errors to test the Martingale difference hypothesis,"
Research Working Paper
RWP 04-03, Federal Reserve Bank of Kansas City.
- Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 155-186.
- International Monetary Fund, 2011. "Foreign Exchange Intervention: A Shield Against Appreciation Winds?," IMF Working Papers 11/165, International Monetary Fund.
- Carvalho, Alexandre & Moura, Marcelo L., 2008.
"What Can Taylor Rules Say About Monetary Policy in Latin America?,"
Insper Working Papers
wpe_126, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
- Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
- Kenneth D. West & Todd Clark, 2006.
"Approximately Normal Tests for Equal Predictive Accuracy in Nested Models,"
NBER Technical Working Papers
0326, National Bureau of Economic Research, Inc.
- Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
- Todd E. Clark & Kenneth D. West, 2005. "Approximately normal tests for equal predictive accuracy in nested models," Research Working Paper RWP 05-05, Federal Reserve Bank of Kansas City.
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